Opinion analysis: Court blesses lower wholesale power rates
on Jan 25, 2016 at 3:56 pm
The Supreme Court on Monday gave full approval to a new federal approach to lowering electricity rates and avoiding power blackouts, rejecting state governments’ strong protests that a U.S. agency was pushing its regulatory mission into their territory. While conceding that the new approach does have an impact on the prices retail customers pay, the Court concluded that every part of the policy is aimed at affecting wholesale rates and the reliability of the nation’s interlinked electricity grid.
The national Federal Power Act draws a boundary between which energy flows can be regulated by the national government and which by state governments, but the line is often sufficiently blurred that repeated contests for authority are stirred up. The latest arose over a 2011 policy of the Federal Energy Regulatory Commission broadening a program to pay utility users to reduce their consumption of power at peak rates. Even larger retail energy users — like major factories and retail stores — regularly get involved by accepting pay for cutting their power demand. The pay-to-cut-back policy is known formally as “demand response” pricing. The ruling came in two cases, under the combined title FERC v. Electric Power Supply Association.
In part, “demand response” reflects the fundamental changes in the way electricity is generated, sent over power lines, and consumed, with regional wholesale operators taking over much that used to be regulated solely by state utility commissions. Instead of a simple pricing policy that pushes prices of power up when demand rises, FERC’s demand response policy depends on a complex system of auction markets in which users who need power bid for it, suppliers pay users to cut back at times when everyone else is using power, suppliers only accept bids that will result in lower wholesale rates, and the stress on the nationwide grid is reduced just at a time when overloads could cause it to shut down in a black-out or “brown-out.”
The local suppliers of energy and state utility regulators contended that the system is designed to pull in retail big buyers of power, who are supposed to be the objects of regulation by the states alone. But the Court, in an opinion written by Justice Elena Kagan, methodically turned aside every objection of the challengers, rejecting the claim of a “power grab” by FERC, and suggested that it would be hard to imagine an approach that more directly affects wholesale rates.
There was only one cautionary note in the Court’s largely positive appraisal of demand response. Noting that federal law gives FERC authority to regulate any electricity operation “affecting” wholesale marketing and pricing, the Court stressed that the word could be an open invitation for the commission to regulate every aspect of power generation and use all across the country. So, it concluded, the commission has a legal duty to do no more than regulate power operations that “directly affect the wholesale rate.”
Otherwise, Kagan wrote, FERC’s authority might be stretched to “near-infinite breadth.” The commission, she added, “cannot take an action” that goes beyond the limits of its authority in the wholesale market. No part of “demand response,” she concluded, exceeds that boundary.
According to the opinion, “wholesale demand response is all about reducing rates; so, too, then, the rules and practices that determine how those programs operate.”
The Court did stress that the Federal Power Act does not attempt to create “a Platonic ideal of strict separation between federal and state realms.” Thus, it said, the actions that FERC does undertake in the wholesale market are bound to have an impact on retail markets as well. But those markets, the Court found, also benefit, from the lower wholesale prices that result from evening out electricity demand and supply, and from the stability of the national grid that is sensitive to disruptions at times of peak load on the system.
The Court reached its result by a six-to-two vote, with Justice Samuel A. Alito, Jr., not taking part, presumably because of his investments in the energy sector. The Kagan opinion was joined by Chief Justice John G. Roberts, Jr., and by Justices Stephen G. Breyer, Ruth Bader Ginsburg, Anthony M.Kennedy, and Sonia Soitomayor.
Justice Antonin Scalia dissented, in an opinion joined by Justice Clarence Thomas.