On Wednesday, October 14, the Supremes will hear oral argument in Electricity Power Supply Association v. Federal Energy Regulatory Commission. The ultimate result could decide the fate of a nascent cleantech industry aimed at promoting efficiency, lowering prices, and reducing greenhouse gas emissions. More fundamentally, though, this case raises important questions about the federalism underpinnings of the U.S. electricity sector, and how well they can adapt to the new energy evolution underway today.

Stretching over six million miles of transmission and distribution lines, incorporating 9,200 generating units, 1,000,000 MW in capacity, and managed by more than 3,000 different entities, the U.S. electricity system is the world’s largest interconnected machine. Per the Federal Power Act of 1935, there are two primary regulators for this immense network: the federal government, acting through the Federal Energy Regulatory Commission (FERC), regulates transmission and wholesale sales of electricity, while states remain in charge of retail sales of electricity as well as matters like generation construction approval and siting. Whether at the wholesale or retail level, FERC and state regulators strive to uphold certain fundamental utility regulation principles, among them: ensuring that rates are “just and reasonable” and in the “public interest.”

A regulatory framework structured around federalism rather than physics may have made sense for a 20th century system comprised of discrete generation, transmission, and distribution units. With today’s grid, however, the Federal/State jurisdictional lines blend together as the grid interconnects new services and technologies that fail to conform to the wholesale/retail dichotomy. The poster child for this new development is demand response.

As demand for electricity goes up periodically (such as when AC units crank up on hot summer days), the transmission system becomes congested, expensive generators come online to meet demand, and prices go up. In markets that allow demand response, large industrial users can volunteer to reduce their consumption to help ease these system constraints. These users can be compensated in exchange for these “negawatts”, i.e. electricity that was never generated, as can the aggregators that organize large groups of these big users. If coordinated and timely, demand response can help level-out system constraints, keep prices low for consumers, curb carbon emissions, and avoid the expensive transmission and generation facility construction that would otherwise be necessary to meet high demand times.

In 2009, FERC issued Orders 719 and 745, to encourage demand response in competitive wholesale electricity markets. With Order 719, FERC required these market administrators — called Independent System Operators (ISOs) or Regional Transmission Operators (RTOs) — to treat demand response “negawatts” the same as megawatts, and Order 745 required “negawatts” to be compensated at essentially the same price as megawatts generated at that same location (a price called the LMP).

FERC’s Orders may have been a welcome relief to stressed-out grid operators and a boon to the growing demand response sector. However, many generators saw this as direct competition and an unfair two-for-one for DR users who got paid on top of the energy savings they already made by cutting their demand. The Electric Power Supply Association, a national trade association for electricity generators in competitive markets, sued FERC and found a receptive audience in a three-judge panel at the D.C. Circuit Court of Appeals.

In its briefs and at oral argument before the D.C. Circuit, FERC argued that it had authority to offer wholesale incentives retail-level demand response users because FPA Section 205 tasked FERC with ensuring “all rules and regulations affecting . . . rates” in connection with the wholesale sale of electric energy are “just and reasonable.” Demand response, although ultimately an end-user (read: retail) activity, falls under FERC’s wholesale jurisdiction because it reaps numerous benefits for the wholesale market, principally: cheaper power and a more reliable grid during destabilizing peak hours. Furthermore, FERC argued, if demand response users are not fairly compensated — i.e. at the LMP level — then overall wholesale prices will increase and no longer be “just and reasonable.”

The court was unpersuaded, and ultimately struck down the Order on two grounds. First, although agreeing that demand response “affects” the wholesale market, the court nonetheless determined that FERC was using its “affecting” jurisdiction to meddle in retail-level activity — an area clearly reserved to the states under the FPA. Since there was no “sale” of electricity — retail or wholesale — FERC’s “wholesale” jurisdiction under FPA 201 is not implicated, regardless of whether such non-sales affect wholesale markets, as the court conceded they did. Second, and as almost an after thought, the court held that FERC did not adequately explain its decision to allow demand response actors to receive the same LMP compensation as their generator competitors.

The lone dissenting judge, Judge Edwards, concisely summed up the counterarguments upon which FERC hinges its appeal now pending before the Supreme Court. The job of the court, Judge Edwards argued, is not to figure out metaphysical line between wholesale and retail sales of electricity. The D.C. Circuit itself has noted before that “the electricity universe” is not so “neatly divided” into such spheres. Transmission Access Policy Study Grp. v. FERC,
225 F.3d 667, 691 (D.C. Cir. 2000). Neither is it the court’s job, Edwards argued, to engage in uncalled for existential philosophizing about “the true nature of a sale that was never made.” The Federal Power Act does not answer these questions, he argued. “Forgone consumption is not unambiguously a ‘sale,’ nor does the statute dictate that demand response be treated solely as a matter of retail regulation.”

In the face of statutory ambiguity, Edwards concluded, the court’s job is to defer to the reasonable interpretation of the regulatory agency. And in his estimation, FERC’s interpretation of its “affecting” jurisdiction was clearly appropriate in the face of the “just and reasonable” wholesale rates, and other system-wide benefits, promoted by demand response.

After filing an unsuccessful motion for rehearing, FERC petitioned the Supreme Court for review of the D.C. Circuit’s decision. The Court allowed the petition and oral argument will be held this coming week.

Although this case may fly under the radar of the public and even many Supreme Court watchers, it will likely have an important impact on our electricity bill. Demand response has been directly linked to lower prices, greater system reliability, as well as reduced carbon emissions. As the grid evolves and more technologies blur this jurisdictional line, services like demand response (not to mention net metering) will not only be possible, but preferable. Yet, whether and how this new service can be incorporated into our binary wholesale/retail, Federal/State framework under the FPA is now in the hands of the Supremes.