Elec. Power Supply Ass'n v. Fed. Energy Regulatory Comm'n

• Decision Date: 23 May 2014
• Docket Number: 12–1088,Nos. 11–1486,12–1093.,12–1091,11–1489,s. 11–1486
• Citation: 753 F.3d 216
• Parties: ELECTRIC POWER SUPPLY ASSOCIATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Madison Gas and Electric Company, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

753 F.3d 216

ELECTRIC POWER SUPPLY ASSOCIATION, Petitioner

v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.Madison Gas and Electric Company, et al., Intervenors.

Nos. 11–1486, 11–1489, 12–1088, 12–1091, 12–1093.

United States Court of Appeals,District of Columbia Circuit.

Argued Sept. 23, 2013.

Decided May 23, 2014.

On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

Ashley C. Parrish argued the cause for petitioners Electric Power Supply Association, et al. With him on the briefs were David G. Tewksbury, Stephanie S. Lim, David B. Raskin, Harvey L. Reiter, and Adrienne E. Clair.

Daniel J. Shonkwiler argued the cause for petitioners California Independent System Operator Corporation, et al. With him on the briefs were Nancy J. Saracino, Roger E. Collanton, Frank R. Lindh, Mary F. McKenzie, and Charlyn A. Hook.

Sandra E. Rizzo was on the brief for intervenors PJM Power Providers Group, et al. in support of petitioners.

Jeffrey A. Lamken, Martin V. Totaro, and John L. Shepherd Jr. were on the brief for amici curiae Robert L. Borlick, et al. in support of petitioners.

Robert H. Solomon, Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were David L. Morenoff, Acting General Counsel, and Holly E. Cafer, Attorney.

Donald J. Sipe, Jonathan G. Mermin, Robert A. Weishaar Jr., Joseph D. Shelby, Barry S. Spector, Paul M. Flynn, Kriss E. Brown, Marvin T. Griff, Miles H. Mitchell, Ransom E. Davis, and Owen J. Kopon were on the brief for intervenors Counsel of Coalition of Midwest Transmission Customers, et al. in support of respondent.

Vickie L. Patton and John N. Moore were on the brief for amici curiae Environmental Defense Fund, et al. in support of respondent.

Before: BROWN, Circuit Judge, and EDWARDS and SILBERMAN, Senior Circuit Judges.

Opinion for the Court by Circuit Judge BROWN.

Dissenting opinion filed by Senior Circuit Judge EDWARDS.

BROWN, Circuit Judge:

Electric Power Supply Association and four other energy industry associations (“Petitioners”) petition this court for review of a final rule by the Federal Energy Regulatory Commission (“FERC” or “the Commission”) governing what FERC calls “demand response resources in the wholesale energy market.” The rule seeks to incentivize retail customers to reduce electricity consumption when economically efficient. Petitioners complain FERC's new rule goes too far, encroaching on the states' exclusive jurisdiction to regulate the retail market. We agree and vacate the rule in its entirety.

I

Under the Federal Power Act (“FPA” or “the Act”) the Commission is generally charged with regulating the transmission and sale of electric power in interstate commerce. The FPA “split[s] [jurisdiction over the sale and delivery of electricity] between the federal government and the states on the basis of the type of service being provided and the nature of the energy sale.” Niagara Mohawk Power Corp. v. FERC, 452 F.3d 822, 824 (D.C.Cir.2006). Section 201 of the Act empowers FERC to regulate “the sale of electric energy at wholesale in interstate commerce.” 16 U.S.C. § 824(b)(1) (emphasis added). Thus, “FERC's jurisdiction over the sale of electricity has been specifically confined to the wholesale market.” New York v. FERC, 535 U.S. 1, 19, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002).

The Commission concedes that “demand response is a complex matter that lies at the confluence of state and federal jurisdiction.” SeeDemand Response Compensation in Organized Wholesale Energy Markets, 134 FERC ¶ 61,187, 2011 WL 890975, at *30 (Mar. 15, 2011) [hereinafter Order 745]. For more than a decade, FERC has permitted demand-side resources to participate in organized wholesale markets, allowing Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) to use demand-side resources to meet their systems' needs for wholesale energy, capacity, and ancillary services. As this court has noted, Congress in 2005 declared “the policy of the United States that time-based pricing and other forms of demand response ... shall be encouraged ... and unnecessary barriers to demand response participation in energy, capacity and ancillary service markets shall be eliminated.” Ind. Util. Reg. Comm'n v. FERC, 668 F.3d 735, 736 (D.C.Cir.2012) (citing 16 U.S.C. § 2642). The Commission has issued dozens of orders on demand-side resource participation, and ISOs and RTOs maintaining economic demand response programs could file tariffs with the Commission and accept bids for ancillary services and from aggregators of retail customers directly into the wholesale energy markets. SeeWholesale Competition in Regions with Organized Electric Markets, 73 Fed.Reg. ¶ 64,100, 64,101 (Oct. 28, 2008) (to be codified at 18 C.F.R. pt. 35) [Order 719].

Order 745 establishes uniform compensation levels for suppliers of demand response resources who participate in the “day-ahead and real-time energy markets.” Order 745, 2011 WL 890975, at *1. The order directs ISOs and RTOs to pay those suppliers, including aggregators of retail customers, the full locational marginal price (LMP), or the marginal value of resources in each market typically used to compensate generators. The Commission conditioned the payment of full LMP on the ability of a demand response resource to replace a generation resource and required demand response to be cost effective. Cost effectiveness would be determined by a newly devised “net benefits test,” which FERC directed ISOs and RTOs to implement. FERC acknowledged that the cost of payments to retail customers to encourage reduced energy consumption would have to be subsidized by load-serving entities participating in the wholesale market. Id. ¶ 99, 2011 WL 890975, at *27;see also id. ¶ 102. Finally, the rule allocated the costs of demand response payments proportionally to all entities that purchase from the relevant energy markets during times when demand response resources enter the market. Commissioner Moeller dissented, arguing the Commission's retail customer compensation scheme conflicted both with FERC's efforts to promote competitive markets and with its statutory mandate to ensure supplies of electric energy at just, reasonable, and not unduly preferential or discriminatory rates. See id., 2011 WL 890975, at *34–39.

Requests for rehearing and clarification were filed by ISOs, RTOs, state regulatory commissions, trade associations, publicly owned utilities, transmission owners, suppliers, and others. The Commission, in another 2–1 decision, confirmed its approach and Petitioners filed timely petitions for review.

II

The Administrative Procedure Act (APA) directs us to “hold unlawful and set aside agency action ... in excess of statutory jurisdiction, authority, or limitations.” 5 U.S.C. § 706(2)(C). “FERC is a creature of statute” and thus “has no power to act unless and until Congress confers power upon it.” Cal. Indep. Sys. Operator Corp. (CAISO) v. FERC, 372 F.3d 395, 398 (D.C.Cir.2004) (citing La. Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 374, 106 S.Ct. 1890, 90 L.Ed.2d 369 (1986)). If FERC lacks authority under the Federal Power Act to promulgate a rule, its action is “plainly contrary to law and cannot stand.” See Michigan v. EPA, 268 F.3d 1075, 1081 (D.C.Cir.2001).

We address FERC's assertion of its statutory authority under the familiar Chevron doctrine. See City of Arlington, Tex. v. FCC, –––U.S. ––––, 133 S.Ct. 1863, 1870–71, ––– L.Ed.2d –––– (2013). The question is “whether the statutory text forecloses the agency's assertion of authority.” Id. at 1871. If, however, the statute is silent or ambiguous on the specific issue, we must defer to the agency's reasonable construction of the statute. Id. at 1868.

FERC claims when retail consumers voluntarily participate in the wholesale market, they fall within the Commission's exclusive jurisdiction to make rules for that market. Petitioners protest that 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. Reply Br. 11–12. The problem, Petitioners say, is the Commission has no authority to draw retail customers into the wholesale markets by paying them not to make retail purchases.

Initially, we note the regulations have a single definition of “demand response”—a “reduction in the consumption of electric energy by customers from their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy.” 18 C.F.R. § 35.28(b)(4) (emphasis added); see alsoOrder 745, 2011 WL 890975, at *1 n. 2. High retail rates will reduce demand. Conversely, if consumers are paid to reduce demand, prices fall. FERC acknowledges the first case, “price-responsive demand” is a “retail-level” demand response. SeeOrder 745, 2011 WL 890975, at *1–3 & n. 2 (citing 18 C.F.R. § 35.28(b)(4)). In contrast, FERC dubs a reduction in the consumption of energy in response to incentive payments a “wholesale demand response.” SeeFERC Br. 5, 34; see alsoOrder 745, 2011 WL 890975, at *1–3 & n. 2 (citing 18 C.F.R. § 35.28(b)(4)). The Commission draws this distinction between “wholesale demand response” and “retail demand response” in an attempt to narrow the logical reach of its rule. See, e.g.,FERC Br. 5 (“[T]he Commission has made plain that its focus is narrow and that it addresses only wholesale demand response.”); id. (“States remain free to authorize and oversee retail demand response programs.”); id. at 14–15. Yet FERC acknowledges “ wholesale demand response” is a fiction of its own construction. See Oral Arg. Tape, No. 11–1486, at 27:31 (Sept. 23, 2013) (conceding “selling” demand response resources in the wholesale market “is a bit of a fiction”). Demand response resources do not actually sell into the market. Demand...