ELR Citation: 44 ELR 20118
No(s). 11-1486 (D.C. Cir. May 23, 2014)

The D.C. Circuit vacated FERC's "demand response" order, which seeks to incentivize retail customers to reduce electricity consumption when economically efficient. The order directs independent system operators to pay electricity users who cut consumption when prices and consumption are high the same rate that they pay generators who supply grid power. Energy industry associations filed a petition for review, claiming that the order goes too far by encroaching on the states’ exclusive jurisdiction to regulate the retail market, and the court agreed. Although §§205 and 206 of the Federal Power Act (FPA) grant FERC authority over demand response resources in the wholesale market, the FPA unambiguously restricts FERC from regulating the retail market. FERC argued that because demand response compensation affects the wholesale market since reducing retail consumption through demand response payments will lower the wholesale price, FPA §§205 and 206 authorized FERC to issue the order. But FERC's rationale has no limiting principle. FERC can only regulate practices affecting the wholesale market under §§205 and 206 provided it is not directly regulating a matter subject to state control, such as the retail market. FERC argued that when retail consumers voluntarily participate in the wholesale market, they fall within FERC's exclusive jurisdiction to make rules for that market. But retail sales of electricity are within the traditional and exclusive jurisdiction of the states, and regulating consumption by retail electricity customers is a regulation of retail, not wholesale, activity. And FERC may not draw retail customers into the wholesale markets by paying them not to make retail purchases. Because the order entails direct regulation of the retail market—a matter exclusively within state control—it exceeds FERC's authority. In addition, the court held that even if FERC had authority to issue the order, it would still fail because it was arbitrary and capricious.