## Facts

- The Federal Power Act (FPA) gives the Federal Energy Regulatory Commission (FERC) authority over wholesale electricity sales in interstate commerce and over “rules or practices affecting” wholesale rates, while states regulate retail electricity sales.
- In organized wholesale markets, “demand response” programs pay retail customers (often via aggregators) to reduce consumption during high-demand periods, which can lower wholesale prices and support reliability.
- In 2011, FERC issued Order No. 745 requiring market operators to (1) accept certain demand response bids in wholesale energy markets and (2) pay successful demand response resources the full locational marginal price (LMP) when a “net benefits test” shows the reduction lowers overall costs to wholesale consumers.
- Electricity generators and industry groups challenged the order, arguing it exceeded FERC’s authority by regulating retail matters and that full-LMP compensation was arbitrary and capricious.
- The D.C. Circuit vacated Order 745, concluding FERC lacked statutory authority and that the compensation rule failed APA review.
- FERC and supporting market participants obtained Supreme Court review.

## Issues

1. Whether the FPA authorizes FERC to regulate wholesale-market rules governing compensation for demand response (reductions in electricity consumption).
2. Whether Order 745’s requirement of full-LMP compensation (subject to a net benefits test) was arbitrary and capricious under the Administrative Procedure Act.

## Decision

- The Supreme Court reversed the D.C. Circuit in a 6–2 decision.
- The Court held that regulating compensation for demand response bids in wholesale auctions falls within FERC’s authority because the practice directly affects wholesale rates.
- The Court rejected the claim that Order 745 impermissibly regulates retail sales, emphasizing the order regulates wholesale market operators and does not set retail rates.
- The Court held the full-LMP compensation choice was not arbitrary and capricious because FERC provided a reasoned, detailed explanation and addressed competing proposals.

## Legal Principles

- Under the FPA, FERC may regulate practices that directly affect wholesale electricity rates, including market rules embedded in wholesale auctions used to set those rates.
- A federal rule does not exceed FERC’s wholesale jurisdiction merely because it has downstream effects on retail markets; wholesale regulation may have predictable retail consequences without becoming retail rate regulation.
- FERC satisfies APA reasoned-decisionmaking requirements when it explains its policy choice in technical market design, addresses significant objections, and supports the rule with a rational account.
- The FPA’s federal–state allocation is maintained when FERC regulates wholesale market mechanisms without setting retail rates, including where a rule preserves space for state decisions about retail-customer participation.

## Conclusion

The Court held that FERC may require wholesale market operators to compensate demand response at full LMP when it benefits wholesale consumers, and that Order 745 reflected reasoned decisionmaking rather than arbitrary or capricious agency action.


FERC v. Elec. Power Supply Ass’n, 577 U.S. 260 (2016)