Federal Energy Regulatory Commission v. Electric Power Supply Association

In 2011, the Federal Energy Regulatory Commission (FERC) (defendant) issued Order No. 745 (the rule) seeking to pay demand-response providers better and encourage their participation in wholesale electricity markets. Demand-response programs were arrangements to pay individual electricity consumers to reduce their electricity usage during periods of high demand or usage. The providers aggregated the individual arrangements and offered this bundle of agreed-upon reductions as a bid in wholesale markets like a bid to supply electricity to the wholesale market. The rule required that demand-response bids receive the same price for electricity conservation as utilities received in the wholesale market for electricity generation (i.e., locational marginal price). For a demand-response bid to qualify to receive the locational marginal price, the bid’s acceptance had to ultimately save wholesalers money. FERC considered alternative compensation schemes. However, based on the economic analysis of a regulatory expert and careful consideration of alternative proposals, FERC determined that demand-response bids and generator bids should receive the same price because they both provided the same value to the wholesale market. Pursuant to FERC rules, state regulatory authorities had the power to bar demand-response providers from wholesale markets if the state so chose. The Electric Power Supply Association (plaintiff) challenged the rule as a usurpation of state power to regulate retail electricity rates. The court of appeals vacated the rule as ultra vires or outside of FERC’s authority because the rule engaged in the direct regulation of the retail electricity sales by encouraging less retail consumption. Alternatively, the court held that the rule was arbitrary and capricious because FERC failed to adequately explain why demand-response providers receiving the locational marginal price was just compensation. The United States Supreme Court granted certiorari.