In a key test of how much the federal government can regulate electricity markets, the Supreme Court this fall will hear arguments on whether the Obama administration overstepped its bounds in requiring power companies to pay customers who use less energy during peak demand hours.
The case, which centers on an electricity market concept known as “demand response,” will determine the Federal Energy Regulatory Commission’s role in giving incentives to individual and business consumers to reduce energy use. In the process, supporters say, demand response will boost reliability of the nation’s electricity grid and reduce greenhouse gas pollution.
Demand response is a voluntary commitment on the part of energy consumers to use less power during peak hours, usually in the middle of the day or during the hottest days of summer when air conditioners run almost constantly. In 2011, FERC issued a rule laying out how consumers should be compensated for participating in the program, which is increasingly popular across the country, industry insiders say.
Power generators maintain that the administration set up a compensation system that was far too generous to consumers. The FERC rule calls for consumers to be compensated at “the market price for energy.”
Last year, a federal appeals court ruled that the federal government exceeded its authority and was meddling in the realm of retail electricity markets, which fall under the legal domain of states.
The complex case, which has attracted relatively little media attention, will set an important precedent for exactly who regulates key components of the U.S. electricity grid, analysts say.
“This case is going to test some very important legal principles, particularly who regulates innovation in the electric grid going forward. And this case, about demand response, could well be a landmark in terms of allocating jurisdictional responsibility between the federal government and the states. And the problem is that nobody knows what the hell this is,” said Joel Eisen, a law professor at the University of Richmond who specializes in energy and environmental law and policy.
One of the most complicated legal issues at play, Mr. Eisen said, is that demand response doesn’t involve the buying or selling of a product, which raises questions about the bounds of federal and state authority.
“By paying me for reducing demand, nobody is buying and selling any electricity. You’re buying and selling this contractual promise to reduce,” he said. “So you can’t say that this is a retail sale of electricity. But the states, and the D.C. Circuit [Court] in the case, said that this is a matter that is within the states’ jurisdiction because it affects what goes on at the retail level.”
When the case comes before the high court this fall, only eight justices will hear arguments. Justice Samuel A. Alito Jr. has recused himself, reportedly because of a conflict of interest.
FERC’s rule does not require anyone to participate in demand response, and the system would remain voluntary even if the court rules in the government’s favor. The legal question, instead, focuses on the regulatory authority of wholesale electricity markets versus retail markets.
Analysts say FERC has clear authority over wholesale markets — the sale of electricity from generators to other entities that, in turn, sell power to consumers.
Retail markets refer to the direct sale of electricity to consumers, and those markets traditionally have been regulated by the states.
The government maintains that it can regulate demand response because of the interstate nature of electricity sales.
Generators argue that FERC has engaged in a blatant “power grab.”
“FERC’s claim that it has authority to regulate reduced retail demand because it has invited ‘demand response providers’ into the wholesale markets merely describes FERC’s power grab without justifying it. FERC cannot expand its own jurisdiction at the expense of the states’ exclusive jurisdiction,” reads a brief filed by the Electric Power Supply Association, the American Public Power Association and other organizations.
Supporters of the government’s position on demand response say there are huge benefits for consumers. By reducing energy use during peak times, consumers are paid a certain amount for not using power and save money by avoiding paying for the electricity in the first place — the reason opponents of the rule say it is too generous.
In the PJM regional transmission area, which includes the District of Columbia and all or part of 13 other states, consumers could save as much as $10 billion each year as a result of participating in demand response, said Frank Lacey, senior vice president for regulatory and market strategy at CPower, a leading energy management company.
“In a world where the utility industry is changing, where environmental restrictions are becoming more burdensome on the existing fleet of power plants demand response is the tool, the buffer, that ensures you can keep the lights on when the grid is strained,” Mr. Lacey said.
At the individual consumer level, demand response can, for example, cycle air conditioning systems so they run for 15 minutes and then automatically shut off for 15 minutes.
“Your house continues to stay comfortable, but you’re using half as much electricity,” Mr. Lacey said, adding that Pepco operates such a program in the D.C. area that cycles about 500,000 air conditioners during peak hours.