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Supreme Court seems troubled over energy pricing rule

WASHINGTON — The U.S. Supreme Court on Wednesday seemed troubled by a federal regulation backed by environmental groups that requires utilities to pay big electric customers who save energy during times of peak demand.

The Obama administration and other supporters say the rule has helped consumers save billions in energy costs, improved reliability of the power grid and helped reduce air pollution since it was put in place in 2011.

But the key question during a one-hour argument that pitted the nation’s current solicitor general against a past holder of the office was whether the Federal Energy Regulatory Commission overstepped its authority in adopting the program, known as demand response.

A federal appeals court ruled 2-1 last year that it intrudes on state power over retail electricity purchases. Federal law gives the commission authority to regulate wholesale markets, while retail sales are governed by states.

The issue appeared to divide the justices along political lines, with conservatives wary the commission had gone too far and liberals more willing to side with the government.

Justice Anthony Kennedy, often a swing vote, appeared concerned that by offering financial incentives to factories, retailers and other large electricity users to reduce their power consumption, the energy commission was indirectly manipulating retail rates.

“It may not be the intention, but it’s the mechanism,” Justice Kennedy said.

Solicitor General Donald Verrilli told the justices the energy commission has the power to protect consumers from “price spikes” and avoid “blackouts and brownouts” on the nation’s electric grid. He said the rule falls squarely within the commission’s authority over wholesale power markets and any impact on retail sales is incidental.

Justice Antonin Scalia insisted the effect was more direct.

“I like deregulated markets, but the problem is you’ve got to have the authority to do it,” Justice Scalia told Verrilli.

The demand response program works by paying electric customers to lower their energy use during times of greatest demand, such as on extremely hot summer days. Cutting back power use reduces the need for electric companies to turn on extra power plants, a move that can also increase power costs.

The rule has won praise from environmental groups that say it helps lower electricity prices by reducing the need to build expensive and air-polluting power plants.

Most traditional utility companies have opposed the regulation on grounds that it is too generous and tramples the exclusive right of states to regulate retail sales.

Arguing for a group of utilities and power suppliers, former solicitor general Paul Clement said the program impermissibly targets retail customers.

“If FERC gets to do this, what’s being sold is an option to buy electricity at a subsidized retail rate,” Clement said.

Justice Stephen Breyer suggested a host of other energy commission regulations also have an indirect effect on retail markets, but not enough to make them invalid.

Carter Phillips, a lawyer representing companies that support the regulation, said the regulation is simply allowing the market to operate in an efficient way.

The demand response program saved customers in the mid-Atlantic region nearly $12 billion in 2013, according to PJM Interconnection, which manages the wholesale power supply for all or part of 13 states.

The regulation itself has remained in effect while the Supreme Court decides whether it’s valid.

Only eight justices heard arguments over the rule. Justice Samuel Alito is taking no part in hearing or deciding the case. A four to four split would leave in place the lower court opinion striking it down.

A ruling is expected by late June.