Scalia suggests FERC demand response rule is ‘mucking around’ in state area

At least a couple of conservative justices on the U.S. Supreme Court appeared skeptical of the Federal Energy Regulatory Commission (FERC) demand response rule, suggesting that it encroaches on state jurisdiction.

“That’s what it goes to in my mind,” Justice Antonin Scalia said of the FERC policy during a hearing before the high court on Oct. 14. Scalia also said that he was not swayed by an “opt-out” provision that FERC offered the states.

“I think it’s an acknowledgment by FERC that, in fact, you know, we are mucking around in an area that’s the state’s area,” Scalia said. “And if the states don’t want us to do it, we won’t do that.”

A 71-page transcript of the proceeding is now available on the Supreme Court website.

The Electric Power Supply Association (EPSA) and certain other industry groups are trying to preserve the legal victory they gained in May 2014. That’s when the U.S. Court of Appeals for the District of Columbia Circuit overturned the FERC rule (Order No. 745) on demand response in its entirety.

The rule apparently pays consumers to use less electricity during peak periods, with an eye toward reducing the chance of blackouts or brownouts.

Only eight justices heard arguments in the case

Both the Wall Street Journal and SCOTUS Blog, which specializes in Supreme Court issues, made much of the fact that only eight Supreme Court justices are considering the case.

Justice Samuel Alito recused himself from the case. That leaves four conservative justices and four liberals to decide the case. The court at times appeared split along ideological lines during the Oct. 24 argument. If the high court were to split 4-to-4, the appeals-court ruling against FERC would be affirmed.

Should such a stalemate occur, leaving the D.C. Circuit decision in place, then the high court result could be issued within days rather than months, one industry observer told GenerationHub.

The Supreme Court granted review as to two questions – one as to whether FERC has jurisdiction under the Federal Power Act and the other as to whether the full locational marginal price (LMP) compensation formula is arbitrary and capricious.

Justice Anthony Kennedy said that a typical Economics student would conclude that “wholesale affects retail and retail affects wholesale, they’re interlinked, which means you [FERC] win the case, except that the statue makes a distinction. We have to make a distinction.”

Kennedy then asked U.S. Solicitor General Donald B. Verrilli, Jr., who represented FERC, to outline the distinction “marks the end of Federal power and the beginning of local power?”

Verrilli pointed to a case involving Southern (NYSE:SO) utility Mississippi Power and nuclear plant recovery costs at the state level.

Scalia, however, said that was “a pretty fuzzy line.” Verrilli replied that FERC was not “fiddling around with retail rates, which is what is asserted is happening here.”

Solicitor General Verrilli went on to say: “What FERC’s rules do is drive the retail price down by driving the wholesale price down by very considerable amounts in peak periods.” The end result is lower rates for retail consumption, he added.

Scalia asked if it would be within FERC’s power to pay consumers a certain amount of money per day not to use more than a set amount of electricity during peak periods.

“I think this is a more straightforward case, because all of the conduct that FERC regulates occurs in the wholesale market,” Verrilli replied.

“But it’s still based on direct price regulation of the retail rate,” Chief Justice John Roberts countered. Roberts compared it to someone standing outside a McDonald’s restaurant and offering approaching customers $5 not to go inside. “FERC is directly affecting the retail price,” Roberts said.

But the solicitor general argued that a case involving New York and FERC makes the demand response rule a “permissible exercise of FERC’s authority.” FERC cannot be making a “power grab” if states can ultimately opt out, Verrilli said.

“There is no statutory text that unambiguously denies FERC this authority that it’s exercising here over this wholesale conduct,” Verrilli said.

EPSA, other generators argue against FERC policy

Attorney Paul Clement said he represented not only EPSA but load serving entities and regulated public utilities. Clement said that his clients had been working on demand response issues “long before FERC got in this business.”

The federal government “operates in its exclusive sphere of the wholesale market, and the states regulate in – exclusively in the retail market,” Clement said.

Clement said some states in the Midcontinent ISO (MISO) have urged FERC not to set the demand response at the full LMP “because that’s too high.”

“Because we love demand response, we want demand response. But we don’t want to pay twice as much as the market really should pay for demand response,” Clement said.

Another group of electric industry clients, including demand response providers, was represented by attorney Carter G. Phillips.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.