The Supreme Court ruled on Monday that the Federal Energy Regulatory Commission (FERC) may employ a regulation strategy that reduces energy use and could save consumers money.
That strategy, called "demand response," is a way of reducing energy use by paying attention to the natural rhythms of the market. Because consumer demand for electricity comes in waves, energy companies that use demand response strategies are able to encourage lower energy use by reducing costs for consumers who decrease their usage at peak times.
The FERC established this strategy in 2011, when it issued FERC Order 745 to regulate demand response as a market mechanism. Power suppliers took issue with the order, which can trim profit margins in an industry that is already contracting.
A conglomeration of energy suppliers brought their case, Federal Energy Regulatory Commission v. Electric Power Supply Association, to the courts to question whether or not the FERC had the legal authority to regulate energy suppliers.
The benefits of such a strategy are manifold. Consumers save money, and the decreased demand for power aids the environment. Environmentalists even say that the strategy could reduce the number of coal-fired power plants necessary to deal with current swings in market demand.
Fred Krupp, the president of the Environmental Defense Fund, said, "Demand response is helping millions of Americans get low-cost, clean and reliable electricity. Today's ruling will help expand customer choice and solidify demand response as a crucial part of our clean energy future."
Many energy companies, however, object. Although the Federal Power Act gives the FERC the authority to regulate wholesale power distribution in interstate commerce, the authority to regulate retail power distributors is reserved to the states.
Power company lawyer Paul Clement explained his clients’ objections, “What FERC was trying to do here was to reduce retail demand by providing payments to retail customers on an otherwise wholesale market in an effort to change the effective price for retail sales.”
Initially, the US Court of Appeals struck down the FERC order. Although some felt that the Supreme Court was uncertain about the FERC’s authority when it heard oral arguments in October, it overturned the Court of Appeals’ decision in a 6-2 ruling on Monday.
Justice Elena Kagan, writing for the majority, argued that wholesale and retail markets are naturally interlinked. Kagan wrote, “transactions that occur on the wholesale market have natural consequences at the retail level. And so too, of necessity, will FERC’s regulation of those wholesale matters.”
For that reason, the majority ruled that although FERC regulation may impact retail markets, it would be an incidental effect of wholesale regulation rather than direct regulation of the retail market itself.
Justices Antonin Scalia and Clarence Thomas dissented, arguing that the FERC’s demand response strategy was beyond its authority.
Monday’s ruling was a victory for the Obama administration, as the president continues to emphasize the importance of environmental consciousness in the last year of his presidency.
White House spokesman Frank Benenati said, “This decision allows us to continue realizing billions in annual savings from innovative incentives and business models that ensure we use our electricity system efficiently as we integrate more energy efficiency and renewable energy onto the power grid.”
Some energy suppliers even supported the Court’s Monday ruling. Exelon Corp. spokesman Paul Elsburg said, “We support demand response as a valuable tool for our customers to manage their energy costs.”