Supreme Court justices appeared split during oral arguments Wednesday in a case that could pare back the federal government’s influence on state electricity markets, hindering President Obama’s clean energy and climate change goals.
Chief Justice John Roberts and Justice Antonin Scalia, along with Justice Anthony Kennedy, challenged how far the Federal Energy Regulatory Commission’s authority goes in affecting prices in the markets that states oversee.
At the center of the case is the commission’s landmark “demand response” program, which directs grid operators to pay consumers to lower their electricity use at times when the grid is stressed. Environmentalists say the program is supremely important to intergrate solar and wind and for limiting the need for new fossil-fuel power plants. FERC is being challenged over the extent of its authority to run such a program.
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The commission argued that the program operates only within its wholesale market jurisdiction, and therefore it has the authority to reward demand response providers to keep energy prices low and prevent blackouts.
But the D.C. Circuit Court of Appeals said last year that the regulator doesn’t have that authority because the program affects rates in the electric markets controlled by states. The commission appealed the lower court’s decision to the Supreme Court.
Scalia and Roberts made comments that appeared to side with the appeals court decision, pressing U.S. Solicitor General Donald Verilli, who was representing the commission, on the limits of the regulator’s powers.
“FERC has raised the retail [rates] during peak hours,” Scalia said, and that by establishing regulations for compensating consumers, it “raises the price” in the state-controlled markets, thereby overstepping its authority.
Verilli said the commission is not interfering with states’ rates, but is using its authority correctly in the federal wholesale markets, which has the effect of driving “the retail rate down.” Verilli made clear that “all actions are in the wholesale market,” not the state markets.
Roberts disagreed. He likened the federal utility commission to someone “standing outside McDonalds … [saying] ‘I’ll give you $4 not to go in,” even though the cost of a hamburger is much lower. He also questioned Verilli’s argument that states have the authority to keep the price wherever they want it, so demand for hamburgers is not manipulated by the federal commision.
“Ultimately, it remains up to the states,” Verilli said.
Scalia disagreed, “I don’t know if FERC really has that power” in differentiating between the federal and state markets. He said he doesn’t believe states have a “veto” on whether they want, or don’t want, the federal market to affect the retail price.
Scalia said that by saying the commission is acting within the wholesale market to affect the retail rate, it is an “acknowledgement by FERC that we are monkeying around” in the state-controlled markets.
Kennedy was on the fence in his questioning, where he said initially that he understands that wholesale affects retail, while calling the program a “lure.”
“It may not be the intention” of the commission to manipulate the state markets, “but it’s the mechanism,” Kennedy said.
He also wanted to know how the commission makes the distinction between retail and wholesale markets.
Roberts chimed in, saying the commission has to have some sort of limiting principle that defines how far the federal government can go in influencing the retail market. “What is the limiting principle?” he asked the solicitor general.
Verilli fired back that the limiting principle is clear: It’s the “conduct that occurs in wholesale auctions” where supply and demand resources are bought and sold.
Scalia said that means the commission is influencing retail rates. But Verilli said all “conduct is in that auction.”
After allowing the conservative justices to pelt Verelli with questions, the liberal justices began to come to FERC’s defense.
Liberal Justice Sonia Sotomayer said it is not the state retailers telling anyone that they are not going to use electricity. “That is correct,” Verilli said.
The Supreme Court in prior cases has given broad discretion to agencies in issues like this one, he said. That discretion, known as the Chevron defense, “requires that the court uphold FERC’s authority here,” Verilli said.
Conservative Justice Samuel Alito recused himself from the proceedings due to a conflict of interest. If the court rules 4-4, it would mean the appeal’s court’s decision is upheld and the program would be killed.
