Supreme Court ruling preserves (and explains) electricity demand response programs

Image by  Good Energy

Image by Good Energy

The Supreme Court issued a ruling this week that hasn't dominated the news cycle, but will have a profound impact on the way electricity markets operate.  In Federal Energy Regulatory Commission v. Electric Power Supply Associationthe Supreme Court upheld a Federal Energy Regulatory Commission (FERC) rule that required electricity operators to compensate demand reductions at the same rate as supplied electricity.  In other words, if you can manipulate the demand for electricity by communicating with consumers and asking for voluntary energy reductions during peak demand periods, every megawatt of avoided electricity will be compensated at the same price as a megawatt of supplied electricity.  

These manipulations are called demand response programs, and they provide benefits across the market.  Major consumers get paid to reduce their energy consumption during peak demand periods, utilities reduce their reliance on the most expensive energy sources, the likelihood of power outages goes down, and consumers benefit from lower prices of wholesale power.  And of course, a reduction in energy consumption is a win for the environment.  The only real losers are energy producers, such as the Electric Power Supply Association.  [David Roberts has a nice rundown of the history of demand response and this case.]

The EPSA contention was that FERC didn't have the authority to issue the rule because regulating retail electricity is a power reserved to the states.  The Court disagreed on the grounds that the Federal Power Act gives FERC the authority to regulate not only wholesale power rates, but also any practices affecting wholesale power rates.  Demand response directly affects wholesale power rates in obvious ways, so the Court ruled that FERC has the authority to create the rule.  The ruling preserves the existence and growth of demand response programs.

But as Matthew Christiansen notes, the Court went even further by finding that regulation of demand response is unambiguously within FERC's authority.  That means FERC won't be able to dismantle demand response programs in the future by reinterpreting its position that it has jurisdiction to regulate them (something a future FERC administration might want to do).  It could do so on substantive policy grounds, but at this point all the evidence on demand response programs supports their continued existence, so a substantive reversal would be tough to justify.

The Court's opinion, which is surprisingly clear in its explanation of demand response programs, can be seen here.