Regulators, utilities spar over paying customers to conserve energy

Among the 10 cases heard at the U.S. Supreme Court so far this term, one case about the market for electricity tackles the question of which government literally has the power—state or federal?

On one side is the Federal Energy Regulatory Commission (FERC), which regulates the interstate transmission of electricity, natural gas, and oil on the wholesale market.

On the other is the Electric Power Supply Association, which represents utilities and power generators. It supports policies that foster competition in the retailmarket.

FERC says utility companies must pay their big-time consumers to scale back using power during peak times like hot summer days. Factories and other big electric customers get paid under this regulatory scheme not to use energy. FERC argues the rule protects against blackouts, brownouts, and price spikes. Of course, power generatorsdon’t like the rule, because they have to pay customers not to use their product.

FERC’s charter only calls for wholesale regulation, so the Supreme Court has to decide whether the federal agency overstepped by involving itself in the sale of electricity to retail consumers.

“If there were a student in Economics 1, it seems to me that he would conclude, and his professor would conclude, that wholesale affects retail, retail affects wholesale,” Justice Anthony Kennedy said. “They’re interlinked.”

Jodi Beggs, a lecturer at Northeastern University, agreed.

“You’re never going to get away from that, economically speaking. So when you’re talking about regulation, it seems like the question is whether it’s directly regulating the retail market, because we could argue that just about any regulation would be indirectlyregulating all markets,” Beggs said.

The statute establishing FERC distinguishes between retail and wholesale, so the court must try to make a distinction, too, Kennedy said.

“Can you tell us what the distinction is that marks the end of federal power and the beginning of local power?” he asked U.S. Solicitor General Donald Verrilli. Chief Justice John Roberts asked a similar question.

Verrilli replied that FERC isn’t directlyregulating retail energy rates. That one market affects another is not the intent, just the result.

“One side of this argument is that the incentives don’t directly change the sticker price and therefore shouldn’t count as regulating the retail price,” Beggs said. “ But the other side of the argument is that if you pay somebody a dollar to not buy a 50-cent apple, you’ve effectively changed the price of the apple to $1.50. So depending on how you’re interpreting the concept of price—whether you see price as that thing on the sticker narrowly speaking, orwhether you see price as economists likely would, as in opportunity cost or what you’re giving up to purchase something—you get to a very different answer regarding whether this action is considered regulating price in the retail market.”

The justices seemed split along political lines, with conservatives favoring states rights and therefore the utilities, and the liberals favoring the agency rule and therefore the big energy-using consumers. Only eight justices will decide this case because Justice Samuel Alito recused himself. He’s a reliable conservative, and that bodes well for the states and utilities on this one. If the court ends up in a 4-4 split, the lower court ruling in favor of the utility companies and state’s rights will stand.

Listen to “Legal Docket” on The World and Everything in It.