FERC v. Electric Power Supply Assn.

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(Slip Opinion) OCTOBER TERM, 2015 1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
FEDERAL ENERGY REGULATORY COMMISSION v.
ELECTRIC POWER SUPPLY ASSOCIATION ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE DISTRICT OF COLUMBIA CIRCUIT*
No. 14–840. Argued October 14, 2015—Decided January 25, 2016
The Federal Power Act (FPA) authorizes the Federal Energy Regulato-
ry Commission (FERC) to regulate “the sale of electric energy at
wholesale in interstate commerce,” including both wholesale electrici-
ty rates and any rule or practice “affecting” such rates. 16 U.S. C.
§§824(b), 824d(a), 824e(a). But it places beyond FERC’s power, leav-
ing to the States alone, the regulation of “any other sale”—i.e., any
retail sale—of electricity. §824(b).
In an increasingly competitive interstate electricity market, FERC
has undertaken to ensure “just and reasonable” wholesale rates,
§824d(a), by encouraging the creation of nonprofit entities to manage
regions of the nationwide electricity grid. These wholesale market
operators administer their portions of the grid to ensure that the
network conducts electricity reliably, and each holds competitive auc-
tions to set wholesale prices. These auctions balance supply and de-
mand continuously by matching bids to provide electricity from gen-
erators with orders from utilities and other “load-serving entities”
(LSEs) that buy power at wholesale for resale to users. All bids to
supply electricity are stacked from lowest to highest, and accepted in
that order until all requests for power have been met. Every electric-
ity supplier is paid the price of the highest-accepted bid, known as
the locational marginal price (LMP).
In periods of high electricity demand, prices can reach extremely
——————
* Together with No. 14–841, EnerNOC, Inc., et al. v. Electric
Power Supply Association et al., also on certiorari to the same
court.
2 FERC v. ELECTRIC POWER SUPPLY ASSN.
Syllabus
high levels as the least efficient generators have their supply bids ac-
cepted in the wholesale market auctions. Not only do rates rise dra-
matically during these peak periods, but the increased flow of elec-
tricity threatens to overload the grid and cause substantial service
problems. Faced with these challenges, wholesale market operators
devised wholesale demand response programs, which pay consumers
for commitments to reduce their use of power during these peak peri-
ods. Just like bids to supply electricity, offers from aggregators of
multiple users of electricity or large individual consumers to reduce
consumption can be bid into the wholesale market auctions. When it
costs less to pay consumers to refrain from using power than it does
to pay producers to supply more of it, demand response can lower
these wholesale prices and increase grid reliability. Wholesale opera-
tors began integrating these programs into their markets some 15
years ago and FERC authorized their use. Congress subsequently
encouraged further development of demand response.
Spurred on by Congress, FERC issued Order No. 719, which,
among other things, requires wholesale market operators to receive
demand response bids from aggregators of electricity consumers, ex-
cept when the state regulatory authority overseeing those users’ re-
tail purchases bars demand response participation. 18 CFR
§35.28(g)(1). Concerned that the order had not gone far enough,
FERC then issued the rule under review here, Order No. 745.
§35.28(g)(1)(v) (Rule). It requires market operators to pay the same
price to demand response providers for conserving energy as to gen-
erators for producing it, so long as a “net benefits test,” which en-
sures that accepted bids actually save consumers money, is met. The
Rule rejected an alternative compensation scheme that would have
subtracted from LMP the savings consumers receive from not buying
electricity in the retail market, a formula known as LMP-G. The
Rule also rejected claims that FERC lacked statutory authority to
regulate the compensation operators pay for demand response bids.
The Court of Appeals for the District of Columbia Circuit vacated
the Rule, holding that FERC lacked authority to issue the order be-
cause it directly regulates the retail electricity market, and holding
in the alternative that the Rule’s compensation scheme is arbitrary
and capricious under the Administrative Procedure Act.
Held:
1. The FPA provides FERC with the authority to regulate whole-
sale market operators’ compensation of demand response bids. The
Court’s analysis proceeds in three parts. First, the practices at issue
directly affect wholesale rates. Second, FERC has not regulated re-
tail sales. Taken together, these conclusions establish that the Rule
complies with the FPA’s plain terms. Third, the contrary view would
Cite as: 577 U. S. ____ (2016) 3
Syllabus
conflict with the FPA’s core purposes. Pp. 14–29.
(a) The practices at issue directly affect wholesale rates. The
FPA has delegated to FERC the authority—and, indeed, the duty—to
ensure that rules or practices “affecting” wholesale rates are just and
reasonable. §§824d(a), 824e(a). To prevent the statute from assum-
ing near-infinite breadth, see e.g., New York State Conference of Blue
Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655,
this Court adopts the D. C. Circuit’s common-sense construction lim-
iting FERC’s “affecting” jurisdiction to rules or practices that “direct-
ly affect the [wholesale] rate,” California Independent System Opera-
tor Corp. v. FERC, 372 F.3d 395, 403 (emphasis added). That
standard is easily met here. Wholesale demand response is all about
reducing wholesale rates; so too the rules and practices that deter-
mine how those programs operate. That is particularly true here, as
the formula for compensating demand response necessarily lowers
wholesale electricity prices by displacing higher-priced generation
bids. Pp. 14–17.
(b) The Rule also does not regulate retail electricity sales in vio-
lation of §824(b). A FERC regulation does not run afoul of §824(b)’s
proscription just because it affects the quantity or terms of retail
sales. Transactions occurring on the wholesale market have natural
consequences at the retail level, and so too, of necessity, will FERC’s
regulation of those wholesale matters. That is of no legal conse-
quence. See, e.g., Mississippi Power & Light Co. v. Mississippi ex rel.
Moore, 487 U.S. 354, 365, 370–373. When FERC regulates what
takes place on the wholesale market, as part of carrying out its
charge to improve how that market runs, then no matter the effect on
retail rates, §824(b) imposes no bar. Here, every aspect of FERC’s
regulatory plan happens exclusively on the wholesale market and
governs exclusively that market’s rules. The Commission’s justifica-
tions for regulating demand response are likewise only about improv-
ing the wholesale market. Cf. Oneok, Inc. v. Learjet, Inc., 575 U. S.
___, ___. Pp. 17–25.
(c) In addition, EPSA’s position would subvert the FPA. EPSA’s
arguments suggest that the entire practice of wholesale demand re-
sponse falls outside what FERC can regulate, and EPSA concedes
that States also lack that authority. But under the FPA, wholesale
demand response programs could not go forward if no entity had ju-
risdiction to regulate them. That outcome would flout the FPA’s core
purposes of protecting “against excessive prices” and ensuring effec-
tive transmission of electric power. Pennsylvania Water & Power Co.
v. FPC, 343 U.S. 414, 418; see Gulf States Util. Co. v. FPC, 411 U.S.
747, 758. The FPA should not be read, against its clear terms, to halt
a practice that so evidently enables FERC to fulfill its statutory du-
4 FERC v. ELECTRIC POWER SUPPLY ASSN.
Syllabus
ties of holding down prices and enhancing reliability in the wholesale
energy market. Pp. 25–29.
2. FERC’s decision to compensate demand response providers at
LMP—the same price paid to generators—instead of at LMP-G, is not
arbitrary and capricious. Under the narrow scope of review in Motor
Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automo-
bile Ins. Co., 463 U.S. 29, 43, this Court’s important but limited role
is to ensure that FERC engaged in reasoned decisionmaking—that it
weighed competing views, selected a compensation formula with ade-
quate support in the record, and intelligibly explained the reasons for
making that decision. Here, FERC provided a detailed explanation of
its choice of LMP and responded at length to contrary views. FERC’s
serious and careful discussion of the issue satisfies the arbitrary and
capricious standard. Pp. 29–33.
753 F.3d 216, reversed and remanded.
KAGAN, J., delivered the opinion of the Court, in which ROBERTS,
C. J., and KENNEDY, GINSBURG, BREYER, and SOTOMAYOR, JJ., joined.
SCALIA, J. filed a dissenting opinion, in which THOMAS, J., joined.
ALITO, J., took no part in the consideration or decision of the cases.
Cite as: 577 U. S. ____ (2016) 1
Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash­
ington, D. C. 20543, of any typographical or other formal errors, in order
that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
_________________
Nos. 14–840 and 14–841
_________________
FEDERAL ENERGY REGULATORY COMMISSION,
PETITIONER
14–840 v.
ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.
ENERNOC, INC., ET AL., PETITIONERS
14–841 v.
ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.
ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
[January 25, 2016]
JUSTICE KAGAN delivered the opinion of the Court.
The Federal Power Act (FPA or Act), 41 Stat. 1063, as
amended, 16 U.S. C. §791a et seq., authorizes the Federal
Energy Regulatory Commission (FERC or Commission) to
regulate “the sale of electric energy at wholesale in inter­
state commerce,” including both wholesale electricity rates
and any rule or practice “affecting” such rates. §§824(b),
824e(a). But the law places beyond FERC’s power, and
leaves to the States alone, the regulation of “any other
sale”—most notably, any retail sale—of electricity.
§824(b). That statutory division generates a steady flow of
jurisdictional disputes because—in point of fact if not of
law—the wholesale and retail markets in electricity are
inextricably linked.
These cases concern a practice called “demand re­
2 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
sponse,” in which operators of wholesale markets pay
electricity consumers for commitments not to use power at
certain times. That practice arose because wholesale
market operators can sometimes—say, on a muggy August
day—offer electricity both more cheaply and more reliably
by paying users to dial down their consumption than by
paying power plants to ramp up their production. In the
regulation challenged here, FERC required those market
operators, in specified circumstances, to compensate the
two services equivalently—that is, to pay the same price to
demand response providers for conserving energy as to
generators for making more of it.
Two issues are presented here. First, and fundamen­
tally, does the FPA permit FERC to regulate these demand
response transactions at all, or does any such rule impinge
on the States’ authority? Second, even if FERC has the
requisite statutory power, did the Commission fail to
justify adequately why demand response providers and
electricity producers should receive the same compensa­
tion? The court below ruled against FERC on both scores.
We disagree.
I
A
Federal regulation of electricity owes its beginnings to
one of this Court’s decisions. In the early 20th century,
state and local agencies oversaw nearly all generation,
transmission, and distribution of electricity. But this
Court held in Public Util. Comm’n of R. I. v. Attleboro
Steam & Elec. Co., 273 U.S. 83, 89–90 (1927), that the
Commerce Clause bars the States from regulating certain
interstate electricity transactions, including wholesale
sales (i.e., sales for resale) across state lines. That ruling
created what became known as the “Attleboro gap”—a
regulatory void which, the Court pointedly noted, only
Congress could fill. See id., at 90.
 Cite as: 577 U. S. ____ (2016) 3
Opinion of the Court
Congress responded to that invitation by passing the
FPA in 1935. The Act charged FERC’s predecessor agency
with undertaking “effective federal regulation of the ex­
panding business of transmitting and selling electric
power in interstate commerce.” New York v. FERC, 535
U.S. 1, 6 (2002) (quoting Gulf States Util. Co. v. FPC, 411
U.S. 747, 758 (1973)). Under the statute, the Commission
has authority to regulate “the transmission of electric
energy in interstate commerce” and “the sale of electric
energy at wholesale in interstate commerce.” 16 U.S. C.
§824(b)(1).
In particular, the FPA obligates FERC to oversee all
prices for those interstate transactions and all rules and
practices affecting such prices. The statute provides that
“[a]ll rates and charges made, demanded, or received by
any public utility for or in connection with” interstate
transmissions or wholesale sales—as well as “all rules
and regulations affecting or pertaining to such rates or
charges”—must be “just and reasonable.” §824d(a). And if
“any rate [or] charge,” or “any rule, regulation, practice, or
contract affecting such rate [or] charge[,]” falls short of
that standard, the Commission must rectify the problem:
It then shall determine what is “just and reasonable” and
impose “the same by order.” §824e(a).
Alongside those grants of power, however, the Act also
limits FERC’s regulatory reach, and thereby maintains a
zone of exclusive state jurisdiction. As pertinent here,
§824(b)(1)—the same provision that gives FERC author­
ity over wholesale sales—states that “this subchapter,”
including its delegation to FERC, “shall not apply to
any other sale of electric energy.” Accordingly, the Com­
mission may not regulate either within-state wholesale
sales or, more pertinent here, retail sales of electricity (i.e.,
sales directly to users). See New York, 535 U.S., at
17, 23. State utility commissions continue to oversee those
transactions.
4 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
Since the FPA’s passage, electricity has increasingly
become a competitive interstate business, and FERC’s role
has evolved accordingly. Decades ago, state or local utili­
ties controlled their own power plants, transmission lines,
and delivery systems, operating as vertically integrated
monopolies in confined geographic areas. That is no longer
so. Independent power plants now abound, and almost
all electricity flows not through “the local power networks
of the past,” but instead through an interconnected “grid”
of near-nationwide scope. See id., at 7 (“electricity that
enters the grid immediately becomes a part of a vast pool
of energy that is constantly moving in interstate com­
merce,” linking producers and users across the country).
In this new world, FERC often forgoes the cost-based rate-
setting traditionally used to prevent monopolistic pricing.
The Commission instead undertakes to ensure “just and
reasonable” wholesale rates by enhancing competition—
attempting, as we recently explained, “to break down
regulatory and economic barriers that hinder a free mar­
ket in wholesale electricity.” Morgan Stanley Capital
Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty.,
554 U.S. 527, 536 (2008).
As part of that effort, FERC encouraged the creation of
nonprofit entities to manage wholesale markets on a
regional basis. Seven such wholesale market operators
now serve areas with roughly two-thirds of the country’s
electricity “load” (an industry term for the amount of
electricity used). See FERC, Energy Primer: A Handbook
of Energy Market Basics 58–59 (Nov. 2015) (Energy
Primer). Each administers a portion of the grid, providing
generators with access to transmission lines and ensuring
that the network conducts electricity reliably. See ibid.
And still more important for present purposes, each opera­
tor conducts a competitive auction to set wholesale prices
for electricity.
These wholesale auctions serve to balance supply and
Cite as: 577 U. S. ____ (2016) 5
Opinion of the Court
demand on a continuous basis, producing prices for elec­
tricity that reflect its value at given locations and times
throughout each day. Such a real-time mechanism is
needed because, unlike most products, electricity cannot
be stored effectively. Suppliers must generate—every day,
hour, and minute—the exact amount of power necessary
to meet demand from the utilities and other “load-serving
entities” (LSEs) that buy power at wholesale for resale to
users. To ensure that happens, wholesale market opera­
tors obtain (1) orders from LSEs indicating how much
electricity they need at various times and (2) bids from
generators specifying how much electricity they can pro­
duce at those times and how much they will charge for it.
Operators accept the generators’ bids in order of cost (least
expensive first) until they satisfy the LSEs’ total demand.
The price of the last unit of electricity purchased is then
paid to every supplier whose bid was accepted, regardless
of its actual offer; and the total cost is split among the
LSEs in proportion to how much energy they have or­
dered. So, for example, suppose that at 9 a.m. on August
15 four plants serving Washington, D. C. can each produce
some amount of electricity for, respectively, $10/unit,
$20/unit, $30/unit, and $40/unit. And suppose that LSEs’
demand at that time and place is met after the operator
accepts the three cheapest bids. The first three generators
would then all receive $30/unit. That amount is (think
back to Econ 101) the marginal cost—i.e., the added cost of
meeting another unit of demand—which is the price an
efficient market would produce. See 1 A. Kahn, The Eco­
nomics of Regulation: Principles and Institutions 65–67
(1988). FERC calls that cost (in jargon that will soon
become oddly familiar) the locational marginal price, or
LMP.1
——————
1 To be more precise, LMP generally includes, in addition to the price
of the highest-accepted bid, certain costs of moving power through the
6 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
As in any market, when wholesale buyers’ demand for
electricity increases, the price they must pay rises corre­
spondingly; and in those times of peak load, the grid’s
reliability may also falter. Suppose that by 2 p.m. on
August 15, it is 98 degrees in D. C. In every home, store,
or office, people are turning the air conditioning up. To
keep providing power to their customers, utilities and
other LSEs must ask their market operator for more
electricity. To meet that spike in demand, the operator
will have to accept more expensive bids from suppliers.
The operator, that is, will have to agree to the $40 bid that
it spurned before—and maybe, beyond that, to bids of $50
or $60 or $70. In such periods, operators often must call
on extremely inefficient generators whose high costs of
production cause them to sit idle most of the time. See
Energy Primer 41–42. As that happens, LMP—the price
paid by all LSEs to all suppliers—climbs ever higher. And
meanwhile, the increased flow of electricity through the
grid threatens to overload transmission lines. See id., at
44. As every consumer knows, it is just when the weather
is hottest and the need for air conditioning most acute that
blackouts, brownouts, and other service problems tend to
occur.
Making matters worse, the wholesale electricity market
lacks the self-correcting mechanism of other markets.
Usually, when the price of a product rises, buyers natu-
rally adjust by reducing how much they purchase. But con­
sumers of electricity—and therefore the utilities and other
LSEs buying power for them at wholesale—do not respond
to price signals in that way. To use the economic term,
demand for electricity is inelastic. That is in part because
electricity is a necessity with few ready substitutes: When
the temperature reaches 98 degrees, many people see no
——————
grid. But those costs are not relevant here, and we therefore disregard
them.
Cite as: 577 U. S. ____ (2016) 7
Opinion of the Court
option but to switch on the AC. And still more: Many
State regulators insulate consumers from short-term
fluctuations in wholesale prices by insisting that LSEs set
stable retail rates. See id., at 41, 43–44. That, one might
say, short-circuits the normal rules of economic behavior.
Even in peak periods, as costs surge in the wholesale
market, consumers feel no pinch, and so keep running the
AC as before. That means, in turn, that LSEs must keep
buying power to send to those users—no matter that
wholesale prices spiral out of control and increased usage
risks overtaxing the grid.
But what if there were an alternative to that scenario?
Consider what would happen if wholesale market opera­
tors could induce consumers to refrain from using (and so
LSEs from buying) electricity during peak periods. When­
ever doing that costs less than adding more power, an
operator could bring electricity supply and demand into
balance at a lower price. And simultaneously, the opera­
tor could ease pressure on the grid, thus protecting
against system failures. That is the idea behind the prac­
tice at issue here: Wholesale demand response, as it is
called, pays consumers for commitments to curtail their
use of power, so as to curb wholesale rates and prevent
grid breakdowns. See id., at 44–46.2
These demand response programs work through the
operators’ regular auctions. Aggregators of multiple users
of electricity, as well as large-scale individual users like
factories or big-box stores, submit bids to decrease electric­
ity consumption by a set amount at a set time for a set
price. The wholesale market operators treat those offers
just like bids from generators to increase supply. The
——————
2 Differently designed demand response programs can operate in
retail markets. Some States, for example, either encourage or require
utilities to offer “critical-peak rebates” to customers for curtailing
electricity use at times of high load. See Energy Primer 45.
8 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
operators, that is, rank order all the bids—both to produce
and to refrain from consuming electricity—from least to
most expensive, and then accept the lowest bids until
supply and demand come into equipoise. And, once again,
the LSEs pick up the cost of all those payments. So, to
return to our prior example, if a store submitted an offer
not to use a unit of electricity at 2 p.m. on August 15 for
$35, the operator would accept that bid before calling on
the generator that offered to produce a unit of power for
$40. That would result in a lower LMP—again, wholesale
market price—than if the market operator could not avail
itself of demand response pledges. See ISO/RTO Council,
Harnessing the Power of Demand: How ISOs and RTOs
Are Integrating Demand Response Into Wholesale Elec­
tricity Markets 40–43 (2007) (estimating that, in one
market, a demand response program reducing electricity
usage by 3% in peak hours would lead to price declines of
6% to 12%). And it would decrease the risk of blackouts
and other service problems.
Wholesale market operators began using demand re­
sponse some 15 years ago, soon after they assumed the
role of overseeing wholesale electricity sales. Recognizing
the value of demand response for both system reliability
and efficient pricing, they urged FERC to allow them to
implement such programs. See, e.g., PJM Interconnection,
L. L. C., Order Accepting Tariff Sheets as Modified, 95
FERC ¶61,306 (2001); California Independent System
Operator Corp., Order Conditionally Accepting for Filing
Tariff Revisions, 91 FERC ¶61,256 (2000). And as de­
mand response went into effect, market participants of
many kinds came to view it—in the words of respondent
Electric Power Supply Association (EPSA)—as an “im­
portant element[ ] of robust, competitive wholesale elec­
tricity markets.” App. 94, EPSA, Comments on Proposed
Rule on Demand Response Compensation in Organized
Wholesale Energy Markets (May 12, 2010).
Cite as: 577 U. S. ____ (2016) 9
Opinion of the Court
Congress added to the chorus of voices praising whole­
sale demand response. In the Energy Policy Act of 2005,
119 Stat. 594 (EPAct), it declared as “the policy of the
United States” that such demand response “shall be en­
couraged.” §1252(f), 119 Stat. 966, 16 U.S. C. §2642 note.
In particular, Congress directed, the deployment of “tech­
nology and devices that enable electricity customers to
participate in . . . demand response systems shall be facili­
tated, and unnecessary barriers to demand response par­
ticipation in energy . . . markets shall be eliminated.”
Ibid.3
B
Spurred on by Congress, the Commission determined to
take a more active role in promoting wholesale demand
response programs. In 2008, FERC issued Order No. 719,
which (among other things) requires wholesale market
operators to receive demand response bids from aggrega­
tors of electricity consumers, except when the state regu­
latory authority overseeing those users’ retail purchases
bars such demand response participation. See 73 Fed.
Reg. 64119, ¶154 (codified 18 CFR §35.28(g)(1) (2015)).
That original order allowed operators to compensate de­
mand response providers differently from generators if
they so chose. No party sought judicial review.
——————
3 The dissent misreads this subsection of the EPAct in suggesting
that it encourages States’ use of retail demand response, rather than
the wholesale programs at issue here. See post, at 8–9 (opinion of
SCALIA, J.); n. 2, supra. The prior subsection, §1252(e), as the dissent
notes, promotes demand response in the States—but then the EPAct
switches gears. Subsection (f) expressly addresses the programs of
“regional electricity entit[ies]”—that is, wholesale market operators.
Indeed, the provision lists all the markets those operators run: not just
the electricity market involved here, but also the “capacity and ancil­
lary service markets.” Those are established components of the whole­
sale system with no counterparts at the state level. See Energy Primer
59.
10 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
Concerned that Order No. 719 had not gone far enough,
FERC issued the rule under review here in 2011, with one
commissioner dissenting. See Demand Response Competi-
tion in Organized Wholesale Energy Markets, Order No.
745, 76 Fed. Reg. 16658 (Rule) (codified 18 CFR
§35.28(g)(1)(v)). The Rule attempts to ensure “just and
reasonable” wholesale rates by requiring market operators
to appropriately compensate demand response providers
and thus bring about “meaningful demand-side participa­
tion” in the wholesale markets. 76 Fed. Reg. 16658, ¶1,
16660, ¶10; 16 U.S. C. §824d(a). The Rule’s most signifi­
cant provision directs operators, under two specified con­
ditions, to pay LMP for any accepted demand response bid,
just as they do for successful supply bids. See 76 Fed. Reg.
16666–16669, ¶¶45–67. In other words, the Rule requires
that demand response providers in those circumstances
receive as much for conserving electricity as generators do
for producing it.
The two specified conditions ensure that a bid to use
less electricity provides the same value to the wholesale
market as a bid to make more. First, a demand response
bidder must have “the capability to provide the service”
offered; it must, that is, actually be able to reduce electric­
ity use and thereby obviate the operator’s need to secure
additional power. Id., at 16666, ¶¶48–49. Second, paying
LMP for a demand response bid “must be cost-effective,”
as measured by a standard called “the net benefits test.”
Ibid., ¶48. That test makes certain that accepting a lower-
priced demand response bid over a higher-priced supply
bid will actually save LSEs (i.e., wholesale purchasers)
money. In some situations it will not, even though accept­
ing a lower-priced bid (by definition) reduces LMP. That
is because (to oversimplify a bit) LSEs share the cost of
paying successful bidders, and reduced electricity use
makes some LSEs drop out of the market, placing a pro­
portionally greater burden on those that are left. Each
Cite as: 577 U. S. ____ (2016) 11
Opinion of the Court
remaining LSE may thus wind up paying more even
though the total bill is lower; or said otherwise, the costs
associated with an LSE’s increased share of compensating
bids may exceed the savings that the LSE obtains from a
lower wholesale price.4 The net benefits test screens out
such counterproductive demand response bids, exempting
them from the Rule’s compensation requirement. See id.,
at 16659, 16666–16667, ¶¶3, 50–53. What remains are
only those offers whose acceptance will result in actual
savings to wholesale purchasers (along with more reliable
service to end users). See id., at 16671, ¶¶78–80.
The Rule rejected an alternative scheme for compensat­
ing demand response bids. Several commenters had urged
that, in paying a demand response provider, an operator
should subtract from the ordinary wholesale price the
savings that the provider nets by not buying electricity on
the retail market. Otherwise, the commenters claimed,
demand response providers would receive a kind of
“double-payment” relative to generators. See id., at 16663,
¶24. That proposal, which the dissenting commissioner
largely accepted, became known as LMP minus G, or more
simply LMP-G, where “G” stands for the retail price of
electricity. See id., at 16668, ¶60, 16680 (Moeller, dissent­
ing). But FERC explained that, under the conditions it
had specified, the value of an accepted demand response
bid to the wholesale market is identical to that of an ac­
cepted supply bid because each succeeds in cost-effectively
“balanc[ing] supply and demand.” Id., at 16667, ¶55.
And, the Commission reasoned, that comparable value is
——————
4 The explanation is a stylized version of the actual phenomenon. In
reality, LSEs rarely drop out of the market entirely because of demand
response; instead, they will merely order less electricity. But the effect
is the same as in the text, because the total cost of accepted bids is
spread among LSEs in proportion to the units of electricity they pur­
chase; and as those units decline, each remaining one bears a greater
share of the bill.
12 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
what ought to matter given FERC’s goal of strengthening
competition in the wholesale market: Rates should reflect
not the costs that each market participant incurs, but
instead the services it provides. See id., at 16668, ¶62.
Moreover, the Rule stated, compensating demand re­
sponse bids at their actual value—i.e., LMP—will help
overcome various technological barriers, including a lack
of needed infrastructure, that impede aggregators and
large-scale users of electricity from fully participating in
demand response programs. See id., at 16667–16668,
¶¶57–58.
The Rule also responded to comments challenging
FERC’s statutory authority to regulate the compensation
operators pay for demand response bids. Pointing to the
Commission’s analysis in Order No. 719, the Rule ex­
plained that the FPA gives FERC jurisdiction over such
bids because they “directly affect[ ] wholesale rates.” Id.,
at 16676, ¶112 (citing 74 id., at 37783, ¶47, and 18
U.S. C. §824d). Nonetheless, the Rule noted, FERC would
continue Order No. 719’s policy of allowing any state
regulatory body to prohibit consumers in its retail market
from taking part in wholesale demand response programs.
See 76 Fed. Reg. 16676, ¶114; 73 id., at 64119, ¶154.
Accordingly, the Rule does not require any “action[ ] that
would violate State laws or regulations.” 76 id., at 16676,
¶114.
C
A divided panel of the Court of Appeals for the District
of Columbia Circuit vacated the Rule as “ultra vires agency
action.” 753 F.3d 216, 225 (2014). The court held that
FERC lacked authority to issue the Rule even though
“demand response compensation affects the wholesale
market.” Id., at 221. The Commission’s “jurisdiction to
regulate practices ‘affecting’ rates,” the court stated, “does
not erase the specific limit[ ]” that the FPA imposes on
Cite as: 577 U. S. ____ (2016) 13
Opinion of the Court
FERC’s regulation of retail sales. Id., at 222. And the
Rule, the court concluded, exceeds that limit: In “luring
. . . retail customers” into the wholesale market, and caus­
ing them to decrease “levels of retail electricity consump­
tion,” the Rule engages in “direct regulation of the retail
market.” Id., at 223–224.
The Court of Appeals held, alternatively, that the Rule
is arbitrary and capricious under the Administrative
Procedure Act, 5 U.S. C. §706(2)(A), because FERC failed
to “adequately explain[ ]” why paying LMP to demand
response providers “results in just compensation.” 753
F.3d, at 225. According to the court, FERC did not
“properly consider” the view that such a payment would
give those providers a windfall by leaving them with “the
full LMP plus . . . the savings associated with” reduced
consumption. Ibid. (quoting Demand Response Competi-
tion in Organized Wholesale Energy Markets: Order on
Rehearing and Clarification, Order No. 745–A (Rehearing
Order), 137 FERC ¶61,215, p. 62,316 (2011) (Moeller,
dissenting)). The court dismissed out of hand the idea
that “comparable contributions [could] be the reason for
equal compensation.” 753 F.3d, at 225.
Judge Edwards dissented. He explained that the rules
governing wholesale demand response have a “direct effect
. . . on wholesale electricity rates squarely within FERC’s
jurisdiction.” Id., at 227. And in setting those rules, he
argued, FERC did not engage in “direct regulation of the
retail market”; rather, “[a]uthority over retail rates . . .
remains vested solely in the States.” Id., at 234 (internal
quotation marks omitted). Finally, Judge Edwards rejected
the majority’s view that the Rule is arbitrary and capri­
cious. He noted the substantial deference due to the
Commission in cases involving ratemaking, and concluded
that FERC provided a “thorough” and “reasonable” expla­
nation for choosing LMP as the appropriate compensation
formula. Id., at 236–238.
14 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
We granted certiorari, 575 U. S. ___ (2015), to decide
whether the Commission has statutory authority to regu­
late wholesale market operators’ compensation of demand
response bids and, if so, whether the Rule challenged here
is arbitrary and capricious. We now hold that the Com­
mission has such power and that the Rule is adequately
reasoned. We accordingly reverse.
II
Our analysis of FERC’s regulatory authority proceeds in
three parts. First, the practices at issue in the Rule—
market operators’ payments for demand response com-
mitments—directly affect wholesale rates. Second, in
addressing those practices, the Commission has not regu­
lated retail sales. Taken together, those conclusions es­
tablish that the Rule complies with the FPA’s plain terms.
And third, the contrary view would conflict with the Act’s
core purposes by preventing all use of a tool that no one
(not even EPSA) disputes will curb prices and enhance
reliability in the wholesale electricity market.5
A
The FPA delegates responsibility to FERC to regulate
the interstate wholesale market for electricity—both
wholesale rates and the panoply of rules and practices
affecting them. As noted earlier, the Act establishes
a scheme for federal regulation of “the sale of electric
energy at wholesale in interstate commerce.” 16 U.S. C.
§824(b)(1); see supra, at 3. Under the statute, “[a]ll rates
and charges made, demanded, or received by any public
utility for or in connection with” interstate wholesale sales
“shall be just and reasonable”; so too shall “all rules and
——————
5 Because we think FERC’s authority clear, we need not address the
Government’s alternative contention that FERC’s interpretation of the
statute is entitled to deference under Chevron U. S. A. Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984).
Cite as: 577 U. S. ____ (2016) 15
Opinion of the Court
regulations affecting or pertaining to such rates or
charges.” §824d(a). And if FERC sees a violation of that
standard, it must take remedial action. More specifically,
whenever the Commission “shall find that any rate [or]
charge”—or “any rule, regulation, practice, or contract
affecting such rate [or] charge”—is “unjust [or] unreason­
able,” then the Commission “shall determine the just and
reasonable rate, charge[,] rule, regulation, practice or
contract” and impose “the same by order.” §824e(a). That
means FERC has the authority—and, indeed, the duty—to
ensure that rules or practices “affecting” wholesale rates
are just and reasonable.
Taken for all it is worth, that statutory grant could
extend FERC’s power to some surprising places. As the
court below noted, markets in all electricity’s inputs—
steel, fuel, and labor most prominent among them—might
affect generators’ supply of power. See 753 F.3d, at 221;
id., at 235 (Edwards, J., dissenting). And for that matter,
markets in just about everything—the whole economy, as
it were—might influence LSEs’ demand. So if indirect or
tangential impacts on wholesale electricity rates sufficed,
FERC could regulate now in one industry, now in another,
changing a vast array of rules and practices to implement
its vision of reasonableness and justice. We cannot imag­
ine that was what Congress had in mind.
For that reason, an earlier D. C. Circuit decision adopted,
and we now approve, a common-sense construction of
the FPA’s language, limiting FERC’s “affecting” jurisdic­
tion to rules or practices that “directly affect the [whole­
sale] rate.” California Independent System Operator Corp.
v. FERC, 372 F.3d 395, 403 (2004) (emphasis added); see
753 F.3d, at 235 (Edwards, J., dissenting). As we have
explained in addressing similar terms like “relating to” or
“in connection with,” a non-hyperliteral reading is needed
to prevent the statute from assuming near-infinite
breadth. See New York State Conference of Blue Cross &
16 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655
(1995) (“If ‘relate to’ were taken to extend to the furthest
stretch of its indeterminacy, then for all practical purposes
[the statute] would never run its course”); Maracich v.
Spears, 570 U. S. ___, ___ (2013) (slip op., at 9) (“The
phrase ‘in connection with’ is essentially indeterminat[e]
because connections, like relations, stop nowhere” (inter­
nal quotation marks omitted)). The Commission itself
incorporated the D. C. Circuit’s standard in addressing its
authority to issue the Rule. See 76 Fed. Reg. 16676, ¶112
(stating that FERC has jurisdiction because wholesale
demand response “directly affects wholesale rates”). We
think it right to do the same.
Still, the rules governing wholesale demand response
programs meet that standard with room to spare. In
general (and as earlier described), wholesale market oper­
ators employ demand response bids in competitive auc­
tions that balance wholesale supply and demand and
thereby set wholesale prices. See supra, at 7–8. The
operators accept such bids if and only if they bring down
the wholesale rate by displacing higher-priced generation.
And when that occurs (most often in peak periods), the
easing of pressure on the grid, and the avoidance of service
problems, further contributes to lower charges. See Brief
for Grid Engineers et al. as Amici Curiae 26–27. Whole­
sale demand response, in short, is all about reducing
wholesale rates; so too, then, the rules and practices that
determine how those programs operate.
And that is particularly true of the formula that opera­
tors use to compensate demand response providers. As in
other areas of life, greater pay leads to greater participa­
tion. If rewarded at LMP, rather than at some lesser
amount, more demand response providers will enter more
bids capable of displacing generation, thus necessarily
lowering wholesale electricity prices. Further, the Com­
mission found, heightened demand response participation
Cite as: 577 U. S. ____ (2016) 17
Opinion of the Court
will put “downward pressure” on generators’ own bids,
encouraging power plants to offer their product at reduced
prices lest they come away empty-handed from the bidding
process. 76 Fed. Reg. 16660, ¶10. That, too, ratchets
down the rates wholesale purchasers pay. Compensation
for demand response thus directly affects wholesale prices.
Indeed, it is hard to think of a practice that does so more.
B
The above conclusion does not end our inquiry into the
Commission’s statutory authority; to uphold the Rule, we
also must determine that it does not regulate retail elec­
tricity sales. That is because, as earlier described, §824(b)
“limit[s] FERC’s sale jurisdiction to that at wholesale,”
reserving regulatory authority over retail sales (as well as
intrastate wholesale sales) to the States. New York, 535
U.S., at 17 (emphasis deleted); see 16 U.S. C. §824(b);
supra, at 3.6 FERC cannot take an action transgressing
that limit no matter how direct, or dramatic, its impact on
wholesale rates. Suppose, to take a far-fetched example,
that the Commission issued a regulation compelling every
consumer to buy a certain amount of electricity on the
retail market. Such a rule would necessarily determine
——————
6 EPSA additionally cites §824(a) as constraining the Commission’s
authority, see Brief for Respondent EPSA et al. 25, 31, 43 (Brief for
Respondents), but that provision adds nothing to the analysis. Section
824(a), the FPA’s “declaration of policy,” states that federal regulation
of electricity is to “extend only to those matters which are not subject to
regulation by the States.” We have often explained that this declara­
tion serves only to frame the Act’s basic structure and purpose. See,
e.g., New York, 535 U.S., at 22 (Section 824(a) “broadly expresse[s] [the
Act’s] purpose” (quoting FPC v. Southern Cal. Edison Co., 376 U.S.
205, 215 (1964)); id., at 215 (Section 824(a) is “merely a ‘policy declara­
tion . . . of great generality’ ” (quoting Connecticut Light & Power Co. v.
FPC, 324 U.S. 515, 527 (1945))). That means, as applied to the issue
here, that §824(a) merely points toward the division of regulatory
authority that §824(b) carries out. The operative provision is what
counts.
18 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
the load purchased on the wholesale market too, and thus
would alter wholesale prices. But even given that ineluc­
table consequence, the regulation would exceed FERC’s
authority, as defined in §824(b), because it specifies terms
of sale at retail—which is a job for the States alone.7
Yet a FERC regulation does not run afoul of §824(b)’s
proscription just because it affects—even substantially—
the quantity or terms of retail sales. It is a fact of eco-
nomic life that the wholesale and retail markets in electric­
ity, as in every other known product, are not hermetically
sealed from each other. To the contrary, transactions that
occur on the wholesale market have natural consequences
at the retail level. And so too, of necessity, will FERC’s
regulation of those wholesale matters. Cf. Oneok, Inc. v.
Learjet, Inc., 575 U. S. ___, ___ (2015) (slip op., at 13)
(noting that in the similarly structured world of natural
gas regulation, a “Platonic ideal” of strict separation be­
——————
7 The dissent disputes this framing of the issue, but its criticism
(made by neither EPSA nor its amici) is irrelevant to deciding this case.
According to the dissent, the FPA prohibits FERC from regulating not
only retail sales of electricity (as we agree) but also any other sales of
electricity aside from wholesale sales. See post, at 2–4. But the dissent
turns out not to argue that the Rule regulates some kind of non-retail,
non-wholesale sale of electric energy (whatever that might be). Rather,
the dissent claims that the Rule regulates retail sales, see post, at 4–
6—exactly the point that we address, and reject, in the following pages.
And in any event, the dissent’s framing of the issue is wrong if and to
the extent it posits some undefined category of other electricity sales
falling within neither FERC’s nor the States’ regulatory authority.
Sales of electric energy come in two varieties: wholesale and retail. The
very case the dissent relies on recognizes that fact by referring to “other
sales, that is, to direct sales for consumptive use.” Panhandle Eastern
Pipe Line Co. v. Public Serv. Comm’n of Ind., 332 U.S. 507, 516 (1947).
FERC regulates interstate wholesale sales of electricity; the States
regulate retail sales of electricity. And FERC may also regulate, as it
did here, practices and rules affecting wholesale prices—that is, mat­
ters beyond wholesale sales themselves—so long as, in doing so, it does
not trespass on the States’ authority to regulate retail sales of electric
power. See supra, at 3.
Cite as: 577 U. S. ____ (2016) 19
Opinion of the Court
tween federal and state realms cannot exist). When FERC
sets a wholesale rate, when it changes wholesale market
rules, when it allocates electricity as between wholesale
purchasers—in short, when it takes virtually any action
respecting wholesale transactions—it has some effect, in
either the short or the long term, on retail rates. That is
of no legal consequence. See, e.g., Mississippi Power &
Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 365,
370–373 (1988) (holding that an order regulating whole­
sale purchases fell within FERC’s jurisdiction, and
preempted contrary state action, even though it clearly
affected retail prices); Nantahala Power & Light Co. v.
Thornburg, 476 U.S. 953, 959–961, 970 (1986) (same);
FPC v. Louisiana Power & Light Co., 406 U.S. 621, 636–
641 (1972) (holding similarly in the natural gas context).
When FERC regulates what takes place on the wholesale
market, as part of carrying out its charge to improve how
that market runs, then no matter the effect on retail rates,
§824(b) imposes no bar.
And in setting rules for demand response, that is all
FERC has done. The Commission’s Rule addresses—and
addresses only—transactions occurring on the wholesale
market. Recall once again how demand response works—
and forgive the coming italics. See supra, at 7–8. Whole-
sale market operators administer the entire program,
receiving every demand response bid made. Those opera­
tors accept such a bid at the mandated price when (and
only when) the bid provides value to the wholesale market
by balancing supply and demand more “cost­
effective[ly]”—i.e., at a lower cost to wholesale purchas­
ers—than a bid to generate power. 76 Fed. Reg. 16659,
16666, ¶2, 48. The compensation paid for a successful bid
(LMP) is whatever the operator’s auction has determined
is the marginal price of wholesale electricity at a particu­
lar location and time. See id., at 16659, ¶2. And those
footing the bill are the same wholesale purchasers that
20 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
have benefited from the lower wholesale price demand
response participation has produced. See id., at 16674,
¶¶99–100. In sum, whatever the effects at the retail level,
every aspect of the regulatory plan happens exclusively on
the wholesale market and governs exclusively that mar­
ket’s rules.
What is more, the Commission’s justifications for regu­
lating demand response are all about, and only about,
improving the wholesale market. Cf. Oneok, 575 U. S., at
___ (slip op., at 11) (considering “the target at which [a]
law aims” in determining whether a State is properly
regulating retail or, instead, improperly regulating whole­
sale sales). In Order No. 719, FERC explained that de­
mand response participation could help create a “well­
functioning competitive wholesale electric energy market”
with “reduce[d] wholesale power prices” and “enhance[d]
reliability.” 73 Fed. Reg. 64103, ¶16. And in the Rule
under review, FERC expanded on that theme. It listed the
several ways in which “demand response in organized
wholesale energy markets can help improve the function­
ing and competitiveness of those markets”: by replacing
high-priced, inefficient generation; exerting “downward
pressure” on “generator bidding strategies”; and “sup­
port[ing] system reliability.” 76 id., at 16660, ¶10; see
Notice of Proposed Rulemaking for Order No. 745, 75 id.,
at 15363–15364, ¶4 (2010) (noting similar aims); supra, at
7–8. FERC, that is, focused wholly on the benefits that
demand response participation (in the wholesale market)
could bring to the wholesale market. The retail market
figures no more in the Rule’s goals than in the mechanism
through which the Rule operates.
EPSA’s primary argument that FERC has usurped state
power (echoed in the dissent) maintains that the Rule
“effectively,” even though not “nominal[ly],” regulates
retail prices. See, e.g., Brief for Respondents 1, 10, 23–27,
35–39; Tr. of Oral Arg. 26, 30; post, at 4–6. The argument
Cite as: 577 U. S. ____ (2016) 21
Opinion of the Court
begins on universally accepted ground: Under §824(b),
only the States, not FERC, can set retail rates. See, e.g.,
FPC v. Conway Corp., 426 U.S. 271, 276 (1976). But as
EPSA concedes, that tenet alone cannot make its case,
because FERC’s Rule does not set actual rates: States
continue to make or approve all retail rates, and in doing
so may insulate them from price fluctuations in the whole­
sale market. See Brief for Respondents 39. Still, EPSA
contends, rudimentary economic analysis shows that the
Rule does the “functional equivalen[t]” of setting—more
particularly, of raising—retail rates. Id., at 36. That is
because the opportunity to make demand response bids in
the wholesale market changes consumers’ calculations. In
deciding whether to buy electricity at retail, economically-
minded consumers now consider both the cost of making
such a purchase and the cost of forgoing a possible de­
mand response payment. So, EPSA explains, if a factory
can buy electricity for $10/unit, but can earn $5/unit for
not buying power at peak times, then the effective retail
rate at those times is $15/unit: the $10 the factory paid at
retail plus the $5 it passed up. See id., at 10. And by thus
increasing effective retail rates, EPSA concludes, FERC
trespasses on the States’ ground.
The modifier “effective” is doing quite a lot of work in
that argument—more work than any conventional under­
standing of rate-setting allows. The standard dictionary
definition of the term “rate” (as used with reference to
prices) is “[a]n amount paid or charged for a good or ser­
vice.” Black’s Law Dictionary 1452 (10th ed. 2014); see,
e.g., 13 Oxford English Dictionary 208–209 (2d ed. 1989)
(“rate” means “price,” “cost,” or “sum paid or asked for a
. . . thing”). To set a retail electricity rate is thus to estab­
lish the amount of money a consumer will hand over in
exchange for power. Nothing in §824(b) or any other part
of the FPA suggests a more expansive notion, in which
FERC sets a rate for electricity merely by altering con­
22 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
sumers’ incentives to purchase that product.8 And neither
does anything in this Court’s caselaw. Our decisions
uniformly speak about rates, for electricity and all else, in
only their most prosaic, garden-variety sense. As the
Solicitor General summarized that view, “the rate is what
it is.” Tr. of Oral Arg. 7. It is the price paid, not the price
paid plus the cost of a forgone economic opportunity.
Consider a familiar scenario to see what is odd about
EPSA’s theory. Imagine that a flight is overbooked. The
airline offers passengers $300 to move to a later plane that
has extra seats. On EPSA’s view, that offer adds $300—
the cost of not accepting the airline’s proffered payment—
to the price of every continuing passenger’s ticket. So a
person who originally spent $400 for his ticket, and de­
cides to reject the airline’s proposal, paid an “effective”
price of $700. But would any passenger getting off the
plane say he had paid $700 to fly? That is highly unlikely.
And airline lawyers and regulators (including many, we
are sure, with economics Ph. D.’s) appear to share that
common-sensical view. It is in fact illegal to “increase the
price” of “air transportation . . . after [such] air transporta­
tion has been purchased by the consumer.” 14 CFR
§399.88(a) (2015). But it is a safe bet that no airline has
ever gotten into trouble by offering a payment not to fly.9
——————
8 The dissent offers, alternatively, a definition of “price,” but that only
further proves our point. “Price,” says the dissent, is “[t]he amount of
money or other consideration asked for or given in exchange for some­
thing else.” Post, at 6 (quoting Black’s Law Dictionary 1380). But the
“effective” rates posited by EPSA and the dissent do not meet that test.
If $10 is the actual rate for a unit of retail electricity, that is the only
amount either “asked for” or “given” in exchange for power. A retail
customer is asked to pay $10 by its LSE, and if it buys that electricity,
it gives the LSE that same $10. By contrast, the $15 “effective” rate is
neither asked for nor given by anyone.
9 The dissent replaces our simple, real-world example with a convo­
luted, fictitious one—but once again merely confirms our point. Sup­
pose, the dissent says, that an airline cancels a passenger’s $400 ticket;
Cite as: 577 U. S. ____ (2016) 23
Opinion of the Court
And EPSA’s “effective price increase” claim fares even
worse when it comes to payments not to use electricity. In
EPSA’s universe, a wholesale demand response program
raises retail rates by compelling consumers to “pay” the
price of forgoing demand response compensation. But
such a consumer would be even more surprised than our
air traveler to learn of that price hike, because the natural
consequence of wholesale demand response programs is to
bring down retail rates. Once again, wholesale market
operators accept demand response bids only if those offers
lower the wholesale price. See supra, at 7–8. And when
wholesale prices go down, retail prices tend to follow,
because state regulators can, and mostly do, insist that
wholesale buyers eventually pass on their savings to
consumers. EPSA’s theoretical construct thus runs head­
long into the real world of electricity sales—where the
Rule does anything but increase retail prices.
EPSA’s second argument that FERC intruded into the
States’ sphere is more historical and purposive in nature.
According to EPSA, FERC deliberately “lured [retail cus­
tomers] into the[ ] wholesale markets”—and, more, FERC
did so “only because [it was] dissatisfied with the States’
exercise of their undoubted authority” under §824(b) to
regulate retail sales. Brief for Respondents 23; see id., at
2–3, 31, 34. In particular, EPSA asserts, FERC disap­
proved of “many States’ continued preference” for stable
——————
gives him a refund plus an extra $300; and then tells him that if he
wants to repurchase the ticket, he must pay $700. Aha!, says the
dissent—isn’t the price now $700? See post, at 5–6. Well, yes it is,
because that is now the actual amount the passenger will have to hand
over to the airline to receive a ticket in exchange (or in the dissent’s
definition of price, the amount “asked for” and “given,” see n. 8, supra).
In other words, in search of an intuitive way to explain its “effective
rate” theory, the dissent must rely on an “actual rate” hypothetical.
But all that does is highlight the distance, captured in the law, between
real prices (reflecting amounts paid) and effective ones (reflecting
opportunity costs).
24 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
pricing—that is, for insulating retail rates from short-term
fluctuations in wholesale costs. Id., at 28. In promoting
demand response programs—or, in EPSA’s somewhat less
neutral language, in “forc[ing] retail customers to respond
to wholesale price signals”—FERC acted “for the express
purpose of overriding” that state policy. Id., at 29, 49.
That claim initially founders on the true facts of how
wholesale demand response came about. Contra EPSA,
the Commission did not invent the practice. Rather, and
as described earlier, the impetus came from wholesale
market operators. See supra, at 8. In designing their
newly organized markets, those operators recognized
almost at once that demand response would lower whole­
sale electricity prices and improve the grid’s reliability. So
they quickly sought, and obtained, FERC’s approval to
institute such programs. Demand response, then,
emerged not as a Commission power grab, but instead as a
market-generated innovation for more optimally balancing
wholesale electricity supply and demand.
And when, years later (after Congress, too, endorsed the
practice), FERC began to play a more proactive role, it did
so for the identical reason: to enhance the wholesale, not
retail, electricity market. Like the market operators,
FERC saw that sky-high demand in peak periods threat­
ened network breakdowns, compelled purchases from
inefficient generators, and consequently drove up whole­
sale prices. See, e.g., 73 Fed. Reg. 64103, ¶16; 76 id., at
16660, ¶10; see supra, at 6–7. Addressing those prob­
lems—which demand response does—falls within the
sweet spot of FERC’s statutory charge. So FERC took
action promoting the practice. No doubt FERC recognized
connections, running in both directions, between the
States’ policies and its own. The Commission understood
that by insulating consumers from price fluctuations,
States contributed to the wholesale market’s difficulties in
optimally balancing supply and demand. See 76 Fed. Reg.
Cite as: 577 U. S. ____ (2016) 25
Opinion of the Court
16667–16668, ¶¶57, 59; supra, at 6–7. And FERC realized
that increased use of demand response in that market
would (by definition) inhibit retail sales otherwise subject
to State control. See 73 Fed. Reg. 64167. But nothing
supports EPSA’s more feverish idea that the Commission’s
interest in wholesale demand response emerged from a
yen to usurp State authority over, or impose its own regu­
latory agenda on, retail sales. In promoting demand
response, FERC did no more than follow the dictates of its
regulatory mission to improve the competitiveness, effi­
ciency, and reliability of the wholesale market.
Indeed, the finishing blow to both of EPSA’s arguments
comes from FERC’s notable solicitude toward the States.
As explained earlier, the Rule allows any State regulator
to prohibit its consumers from making demand response
bids in the wholesale market. See 76 id., at 16676, ¶114;
73 id., at 64119, ¶154; supra, at 12. Although claiming
the ability to negate such state decisions, the Commission
chose not to do so in recognition of the linkage between
wholesale and retail markets and the States’ role in over­
seeing retail sales. See 76 Fed. Reg. 16676, ¶¶112–114.
The veto power thus granted to the States belies EPSA’s
view that FERC aimed to “obliterate[ ]” their regulatory
authority or “override” their pricing policies. Brief for
Respondents 29, 33. And that veto gives States the means
to block whatever “effective” increases in retail rates
demand response programs might be thought to produce.
Wholesale demand response as implemented in the Rule is
a program of cooperative federalism, in which the States
retain the last word. That feature of the Rule removes
any conceivable doubt as to its compliance with §824(b)’s
allocation of federal and state authority.
C
One last point, about how EPSA’s position would sub­
vert the FPA.
26 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
EPSA’s jurisdictional claim, as may be clear by now,
stretches very far. Its point is not that this single Rule,
relating to compensation levels, exceeds FERC’s power.
Instead, EPSA’s arguments—that rewarding energy con­
servation raises effective retail rates and that “luring”
consumers onto wholesale markets aims to disrupt state
policies—suggest that the entire practice of wholesale
demand response falls outside what FERC can regulate.
EPSA proudly embraces that point: FERC, it declares,
“has no business regulating ‘demand response’ at all.” Id.,
at 24. Under EPSA’s theory, FERC’s earlier Order No.
719, although never challenged, would also be ultra vires
because it requires operators to open their markets to
demand response bids. And more: FERC could not even
approve an operator’s voluntary plan to administer a
demand response program. See Tr. of Oral Arg. 44. That
too would improperly allow a retail customer to participate
in a wholesale market.
Yet state commissions could not regulate demand re­
sponse bids either. EPSA essentially concedes this point.
See Brief for Respondents 46 (“That may well be true”).
And so it must. The FPA “leaves no room either for direct
state regulation of the prices of interstate wholesales” or
for regulation that “would indirectly achieve the same
result.” Northern Natural Gas Co. v. State Corporation
Comm’n of Kan., 372 U.S. 84, 91 (1963). A State could not
oversee offers, made in a wholesale market operator’s
auction, that help to set wholesale prices. Any effort of
that kind would be preempted.
And all of that creates a problem. If neither FERC nor
the States can regulate wholesale demand response, then
by definition no one can. But under the Act, no electricity
transaction can proceed unless it is regulable by someone.
As earlier described, Congress passed the FPA precisely to
eliminate vacuums of authority over the electricity mar­
kets. See supra, at 2–3. The Act makes federal and state
Cite as: 577 U. S. ____ (2016) 27
Opinion of the Court
powers “complementary” and “comprehensive,” so that
“there [will] be no ‘gaps’ for private interests to subvert
the public welfare.” Louisiana Power & Light Co., 406
U.S., at 631. Or said otherwise, the statute prevents the
creation of any regulatory “no man’s land.” FPC v. Trans-
continental Gas Pipe Line Corp., 365 U.S. 1, 19 (1961); see
id., at 28. Some entity must have jurisdiction to regulate
each and every practice that takes place in the electricity
markets, demand response no less than any other.10
For that reason, the upshot of EPSA’s view would be to
extinguish the wholesale demand response program in its
entirety. Under the FPA, each market operator must
submit to FERC all its proposed rules and procedures.
See 16 U.S. C. §§824d(c)–(d); 18 CFR §§35.28(c)(4),
35.3(a)(1). Assume that, as EPSA argues, FERC could not
authorize any demand response program as part of that
package. Nor could FERC simply allow such plans to go
into effect without its consideration and approval. There
are no “off the books” programs in the wholesale electricity
markets—because, once again, there is no regulatory “no
man’s land.” Transcontinental, 365 U.S., at 19. The FPA
mandates that FERC review, and ensure the reasonable­
——————
10 The dissent contests this point (complaining that our decades’
worth of precedents affirming it partly rely on legislative history), but
the example the dissent offers in response misses the mark. See post,
at 7–8. The dissent hypothesizes a rule enabling generators to sell
directly to consumers and fixing all generation, transmission, and retail
rates. But of course neither FERC nor the States could issue such a
rule: If FERC did so, it would interfere with the States’ authority over
retail sales and rates as well as (most) generation; if a State did so, it
would interfere with FERC’s power over transmission. Thus, to imple­
ment such a scheme, the States would need to do some things and
FERC to do others. And if the one or the other declined to cooperate,
then the full scheme could not proceed. But that just goes to show that
the FPA divides regulatory power over electricity matters between
FERC and the States. The example does nothing to demonstrate that
some electricity transactions can proceed outside any regulator’s
authority.
28 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
ness of, every wholesale rule and practice. See 16 U.S. C.
§§824d(a), 824e(a); supra, at 3, 14–15. If FERC could not
carry out that duty for demand response, then those pro­
grams could not go forward.
And that outcome would flout the FPA’s core objects.
The statute aims to protect “against excessive prices” and
ensure effective transmission of electric power. Pennsyl-
vania Water & Power Co. v. FPC, 343 U.S. 414, 418
(1952); see Gulf States Util. Co. v. FPC, 411 U.S. 747, 758
(1973). As shown above, FERC has amply explained how
wholesale demand response helps to achieve those ends,
by bringing down costs and preventing service interrup­
tions in peak periods. See supra, at 20. No one taking
part in the rulemaking process—not even EPSA—
seriously challenged that account. Even as he objected to
FERC’s compensation formula, Commissioner Moeller
noted the unanimity of opinion as to demand response’s
value: “[N]owhere did I review any comment or hear any
testimony that questioned the benefit of having demand
response resources participate in the organized wholesale
energy markets. On this point, there is no debate.” 76
Fed. Reg. 16679; see also App. 82, EPSA, Comments on
Proposed Rule (avowing “full[ ] support” for demand re­
sponse participation in wholesale markets because of its
“economic and operational” benefits).11 Congress itself
——————
11 EPSA now contends that wholesale demand response is unneces­
sary because state regulators can adopt programs to reduce demand at
the retail level. See Brief for Respondents 46–47. For example, States
can insist that utilities give rebates to customers for not using energy
at certain times. See n. 2, supra. But according to both the Commis­
sion and market participants, state-level programs cannot offer nearly
the same benefits as wholesale demand response because individual
utilities lack the regional scope and real-time information needed to
identify when demand response will lower prices and ensure reliability
system-wide. See 73 Fed. Reg. 64103, ¶18; Energy Primer 45–46; Brief
for NRG Energy, Inc., as Amicus Curiae 20–22. Similarly, FERC
addressed and rejected the dissent’s suggestion that wholesale market
Cite as: 577 U. S. ____ (2016) 29
Opinion of the Court
agreed, “encourag[ing]” greater use of demand response
participation at the wholesale level. EPAct §1252(f ), 119
Stat. 966. That undisputed judgment extinguishes any
last flicker of life in EPSA’s argument. We will not read
the FPA, against its clear terms, to halt a practice that so
evidently enables the Commission to fulfill its statutory
duties of holding down prices and enhancing reliability in
the wholesale energy market.
III
These cases present a second, narrower question: Is
FERC’s decision to compensate demand response provid­
ers at LMP—the same price paid to generators—arbitrary
and capricious? Recall here the basic issue. See supra, at
9–12. Wholesale market operators pay a single price—
LMP—for all successful bids to supply electricity at a
given time and place. The Rule orders operators to pay
the identical price for a successful bid to conserve electric­
ity so long as that bid can satisfy a “net benefits test”—
meaning that it is sure to bring down costs for wholesale
purchasers. In mandating that payment, FERC rejected
an alternative proposal under which demand response
providers would receive LMP minus G (LMP-G), where G
is the retail rate for electricity. According to EPSA and
others favoring that approach, demand response providers
get a windfall—a kind of “double-payment”—unless mar­
ket operators subtract the savings associated with con­
serving electricity from the ordinary compensation level.
76 Fed. Reg. 16663, ¶24. EPSA now claims that FERC
failed to adequately justify its choice of LMP rather than
——————
operators could pay LSEs to reduce their electricity purchases: Because
LSEs lose revenues whenever demand goes down, any demand re­
sponse programs targeting those actors would be highly inefficient. See
FERC, Assessment of Demand Response and Advanced Metering 72
(2006); Tr. of Oral Arg. 56 (Solicitor General noting that LSEs engaged
in demand response would be “cannibaliz[ing] their own profits”).
30 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
LMP-G.
In reviewing that decision, we may not substitute our
own judgment for that of the Commission. The “scope of
review under the ‘arbitrary and capricious’ standard is
narrow.” Motor Vehicle Mfrs. Assn. of United States, Inc.
v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29, 43
(1983). A court is not to ask whether a regulatory decision
is the best one possible or even whether it is better than
the alternatives. Rather, the court must uphold a rule if
the agency has “examine[d] the relevant [considerations]
and articulate[d] a satisfactory explanation for its action[,]
including a rational connection between the facts found
and the choice made.” Ibid. (internal quotation marks
omitted). And nowhere is that more true than in a tech­
nical area like electricity rate design: “[W]e afford great
deference to the Commission in its rate decisions.” Mor-
gan Stanley, 554 U.S., at 532.
Here, the Commission gave a detailed explanation of its
choice of LMP. See 76 Fed. Reg. 16661–16669, ¶¶18–67.
Relying on an eminent regulatory economist’s views,
FERC chiefly reasoned that demand response bids should
get the same compensation as generators’ bids because
both provide the same value to a wholesale market. See
id., at 16662–16664, 16667–16668, ¶¶20, 31, 57, 61; see
also App. 829–851, Reply Affidavit of Dr. Alfred E. Kahn
(Aug. 30, 2010) (Kahn Affidavit). FERC noted that a
market operator needs to constantly balance supply and
demand, and that either kind of bid can perform that
service cost-effectively—i.e., in a way that lowers costs for
wholesale purchasers. See 76 Fed. Reg. 16667–16668,
¶¶56, 61. A compensation system, FERC concluded,
therefore should place the two kinds of bids “on a competi­
tive par.” Id., at 16668, ¶61 (quoting Kahn Affidavit); see
also App. 830, Kahn Affidavit (stating that “economic
efficiency requires” compensating the two equally given
their equivalent function in a “competitive power mar­
Cite as: 577 U. S. ____ (2016) 31
Opinion of the Court
ket[ ]”). With both supply and demand response available
on equal terms, the operator will select whichever bids, of
whichever kind, provide the needed electricity at the
lowest possible cost. See Rehearing Order, 137 FERC, at
62,301–62,302, ¶68 (“By ensuring that both . . . receive the
same compensation for the same service, we expect the
Final Rule to enhance the competitiveness” of wholesale
markets and “result in just and reasonable rates”).
That rationale received added support from FERC’s
adoption of the net benefits test. The Commission realized
during its rulemaking that in some circumstances a de­
mand response bid—despite reducing the wholesale rate—
does not provide the same value as generation. See 76
Fed. Reg. 16664–16665, ¶38. As described earlier, that
happens when the distinctive costs associated with com­
pensating a demand response bid exceed the savings from
a lower wholesale rate: The purchaser then winds up
paying more than if the operator had accepted the best
(even though higher priced) supply bid available. See
supra, at 10–11. And so FERC developed the net benefits
test to filter out such cases. See 76 Fed. Reg. 16666–
16667, ¶¶50–53. With that standard in place, LMP is paid
only to demand response bids that benefit wholesale pur­
chasers—in other words, to those that function as “cost­
effective alternative[s] to the next highest-bid generation.”
Id., at 16667, ¶54. Thus, under the Commission’s ap­
proach, a demand response provider will receive the same
compensation as a generator only when it is in fact provid­
ing the same service to the wholesale market. See ibid.,
¶53.
The Commission responded at length to EPSA’s con­
trary view that paying LMP, even in that situation, will
overcompensate demand response providers because they
are also “effectively receiv[ing] ‘G,’ the retail rate that they
do not need to pay.” Id., at 16668, ¶60. FERC explained
that compensation ordinarily reflects only the value of the
32 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
service an entity provides—not the costs it incurs, or
benefits it obtains, in the process. So when a generator
presents a bid, “the Commission does not inquire into the
costs or benefits of production.” Ibid., ¶62. Different
power plants have different cost structures. And, indeed,
some plants receive tax credits and similar incentive
payments for their activities, while others do not. See
Rehearing Order, 137 FERC, at 62,301, ¶65, and n. 122.
But the Commission had long since decided that such
matters are irrelevant: Paying LMP to all generators—
although some then walk away with more profit and some
with less—“encourages more efficient supply and demand
decisions.” 76 Fed. Reg. 16668, ¶62 (internal quotation
marks omitted). And the Commission could see no eco­
nomic reason to treat demand response providers any
differently. Like generators, they too experience a range
of benefits and costs—both the benefits of not paying for
electricity and the costs of not using it at a certain time.
But, FERC again concluded, that is immaterial: To in­
crease competition and optimally balance supply and
demand, market operators should compensate demand
response providers, like generators, based on their contri­
bution to the wholesale system. See ibid.; 137 FERC, at
62,300, ¶60.
Moreover, FERC found, paying LMP will help demand
response providers overcome certain barriers to participa­
tion in the wholesale market. See 76 Fed. Reg. 16667–
16668, ¶¶57–59. Commenters had detailed significant
start-up expenses associated with demand response, in­
cluding the cost of installing necessary metering technol-
ogy and energy management systems. See id., at 16661,
¶18, 16667–16668, ¶57; see also, e.g., App. 356, Viridity
Energy, Inc., Comments on Proposed Rule on Demand
Response Compensation in Organized Wholesale Energy
Markets (May 13, 2010) (noting the “capital investments
and operational changes needed” for demand response
Cite as: 577 U. S. ____ (2016) 33
Opinion of the Court
participation). The Commission agreed that such factors
inhibit potential demand responders from competing with
generators in the wholesale markets. See 76 Fed. Reg.
16668, ¶59. It concluded that rewarding demand response
at LMP (which is, in any event, the price reflecting its
value to the market) will encourage that competition and,
in turn, bring down wholesale prices. See ibid.
Finally, the Commission noted that determining the “G”
in the formula LMP-G is easier proposed than accom­
plished. See ibid., ¶63. Retail rates vary across and even
within States, and change over time as well. Accordingly,
FERC concluded, requiring market operators to incorpo­
rate G into their prices, “even though perhaps feasible,”
would “create practical difficulties.” Ibid. Better, then,
not to impose that administrative burden.
All of that together is enough. The Commission, not this
or any other court, regulates electricity rates. The dis-
puted question here involves both technical understanding
and policy judgment. The Commission addressed that
issue seriously and carefully, providing reasons in support
of its position and responding to the principal alternative
advanced. In upholding that action, we do not discount
the cogency of EPSA’s arguments in favor of LMP-G. Nor
do we say that in opting for LMP instead, FERC made the
better call. It is not our job to render that judgment, on
which reasonable minds can differ. Our important but
limited role is to ensure that the Commission engaged in
reasoned decisionmaking—that it weighed competing
views, selected a compensation formula with adequate
support in the record, and intelligibly explained the
reasons for making that choice. FERC satisfied that
standard.
IV
FERC’s statutory authority extends to the Rule at issue
here addressing wholesale demand response. The Rule
34 FERC v. ELECTRIC POWER SUPPLY ASSN.
Opinion of the Court
governs a practice directly affecting wholesale electricity
rates. And although (inevitably) influencing the retail
market too, the Rule does not intrude on the States’ power
to regulate retail sales. FERC set the terms of transac­
tions occurring in the organized wholesale markets, so as
to ensure the reasonableness of wholesale prices and the
reliability of the interstate grid—just as the FPA contem­
plates. And in choosing a compensation formula, the
Commission met its duty of reasoned judgment. FERC
took full account of the alternative policies proposed, and
adequately supported and explained its decision. Accord­
ingly, we reverse the judgment of the Court of Appeals for
the District of Columbia Circuit and remand the cases for
further proceedings consistent with this opinion.
It is so ordered.
JUSTICE ALITO took no part in the consideration or
decision of these cases.
Cite as: 577 U. S. ____ (2016) 1
SCALIA, J., dissenting
SUPREME COURT OF THE UNITED STATES
_________________
Nos. 14–840 and 14–841
_________________
FEDERAL ENERGY REGULATORY COMMISSION,
PETITIONER
14–840 v.
ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.
ENERNOC, INC., ET AL., PETITIONERS
14–841 v.
ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.
ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
[January 25, 2016]
JUSTICE SCALIA, with whom JUSTICE THOMAS joins,
dissenting.
I believe the Federal Power Act (FPA or Act), 16 U.S. C.
§791a et seq., prohibits the Federal Energy Regulatory
Commission (FERC) from regulating the demand response
of retail purchasers of power. I respectfully dissent from
the Court’s holding to the contrary.
I
A
I agree with the majority that FERC has the authority
to regulate practices “affecting” wholesale rates.
§§824d(a), 824e(a); Mississippi Power & Light Co. v. Mis-
sissippi ex rel. Moore, 487 U.S. 354, 371 (1988). I also
agree that this so-called “affecting” jurisdiction cannot be
limitless. And I suppose I could even live with the Court’s
“direct effect” test as a reasonable limit. Ante, at 15. But
as the majority recognizes, ante, at 17, that extratextual
limit on the “affecting” jurisdiction merely supplements,
2 FERC v. ELECTRIC POWER SUPPLY ASSN.
SCALIA, J., dissenting
not supplants, limits that are already contained in the
statutory text and structure. I believe the Court miscon-
strues the primary statutory limit. (Like the majority, I
think that deference under Chevron U. S. A. Inc. v. Natu-
ral Resources Defense Council, Inc., 467 U.S. 837 (1984),
is unwarranted because the statute is clear.)
The Act grants FERC authority to regulate the “genera-
tion . . . [and] transmission of electric energy in interstate
commerce and the sale of such energy at wholesale.”
§824(a). Yet the majority frames the issue thusly: “[T]o
uphold the [r]ule, we also must determine that it does not
regulate retail electricity sales.” Ante, at 17. That formu-
lation inverts the proper inquiry. The pertinent question
under the Act is whether the rule regulates sales “at
wholesale.” If so, it falls within FERC’s regulatory author-
ity. If not, the rule is unauthorized whether or not it
happens to regulate “retail electricity sales”; for, with
exceptions not material here, the FPA prohibits FERC
from regulating “any other sale of electric energy” that is
not at wholesale. §824(b)(1) (emphasis added). (The
majority wisely ignores FERC’s specious argument that
the demand-response rule does not regulate any sale,
wholesale or retail. See Brief for Petitioner in No. 14–840,
p. 39. Paying someone not to conclude a transaction that
otherwise would without a doubt have been concluded is
most assuredly a regulation of that transaction. Cf. Gon-
zales v. Raich, 545 U.S. 1, 39–40 (2005) (SCALIA, J., con-
curring in judgment).)
Properly framing the inquiry matters not because I
think there exists “some undefined category of . . . electric-
ity sales” that is “non-retail [and] non-wholesale,” ante, at
18, n. 7,* but because a proper framing of the inquiry is
——————
* Although the majority dismisses this possibility, in fact it appears to
think that demand response is in that category: It rejects the conclusion
that the demand-response rule regulates retail sales, ante, at 17–23,
Cite as: 577 U. S. ____ (2016) 3
SCALIA, J., dissenting
important to establish the default presumption regarding
the scope of FERC’s authority. While the majority would
find every sale of electric energy to be within FERC’s
authority to regulate unless the transaction is demonstra-
bly a retail sale, the statute actually excludes from FERC’s
jurisdiction all sales of electric energy except those that
are demonstrably sales at wholesale.
So what, exactly, is a “sale of electric energy at whole-
sale”? We need not guess, for the Act provides a defini-
tion: “a sale of electric energy to any person for resale.”
§824(d) (emphasis added). No matter how many times the
majority incants and italicizes the word “wholesale,” ante,
at 19–20, nothing can change the fact that the vast major-
ity of (and likely all) demand-response participants—
“[a]ggregators of multiple users of electricity, as well as
large-scale individual users like factories or big-box
stores,” ante, at 7—do not resell electric energy; they con-
sume it themselves. FERC’s own definition of demand
response is aimed at energy consumers, not resellers. 18
CFR §35.28(b)(4) (2015).
It is therefore quite beside the point that the challenged
“[r]ule addresses—and addresses only—transactions
occurring on the wholesale market,” ante, at 19. For
FERC’s regulatory authority over electric-energy sales
depends not on which “market” the “transactions occu[r]
on” (whatever that means), but rather on the identity of
the putative purchaser. If the purchaser is one who resells
electric energy to other customers, the transaction is one
“at wholesale” and thus within FERC’s authority. If not,
then not. Or so, at least, says the statute. As we long ago
said of the parallel provision in the Natural Gas Act, 15
U.S. C. §717, “[t]he line of the statute [i]s thus clear and
——————
yet also implicitly rejects the conclusion that it regulates wholesale
sales—otherwise why rely on FERC’s “affecting ” jurisdiction to rescue
the rule’s legitimacy?
4 FERC v. ELECTRIC POWER SUPPLY ASSN.
SCALIA, J., dissenting
complete. It cut[s] sharply and cleanly between sales for
resale and direct sales for consumptive uses. No excep-
tions [a]re made in either category for particular uses,
quantities, or otherwise.” Panhandle Eastern Pipe Line
Co. v. Public Serv. Comm’n of Ind., 332 U.S. 507, 517
(1947). The majority makes no textual response to this
plain reading of the statute.
The demand-response bidders here indisputably do not
resell energy to other customers. It follows that the rule
does not regulate electric-energy sales “at wholesale,” and
16 U.S. C. §824(b)(1) therefore forbids FERC to regulate
these demand-response transactions. See New York v.
FERC, 535 U.S. 1, 17 (2002). That is so whether or not
those transactions “directly affect” wholesale rates; as we
recently said in another context, we will not adopt a con-
struction that “needlessly produces a contradiction in the
statutory text.” Shapiro v. McManus, 577 U. S. ___, ___
(2015) (slip op., at 4). A faithful application of that princi-
ple would compel the conclusion that FERC may not “do
under [§§824d(a) and 824e(a)] what [it] is forbidden to do
under [§824(b)(1)].” Id., at ___ (slip op., at 5).
B
The analysis could stop there. But the majority is
wrong even on its own terms, for the rule at issue here
does in fact regulate “retail electricity sales,” which are
indisputably “matters . . . subject to regulation by the
States” and therefore off-limits to FERC. §824(a); see FPC
v. Conway Corp., 426 U.S. 271, 276 (1976); Panhandle
Eastern Pipe Line Co., supra, at 517–518. The demand-
response participants are retail customers—they purchase
electric energy solely for their own consumption. And
FERC’s demand-response scheme is intentionally “de-
signed to induce lower consumption of electric energy”—in
other words, to induce a reduction in “retail electricity
sales”—by offering “incentive payments” to those custom-
Cite as: 577 U. S. ____ (2016) 5
SCALIA, J., dissenting
ers. 18 CFR §35.28(b)(4). The incentive payments effec-
tively increase the retail price of electric energy for partic-
ipating customers because they must now account for the
opportunity cost of using, as opposed to abstaining from
using, more energy. In other words, it literally costs them
more to buy energy on the retail market. In the court
below, FERC conceded that offering credits to retail cus-
tomers to reduce their electricity consumption “would be
an impermissible intrusion into the retail market” because
it would in effect regulate retail rates. 753 F.3d 216, 223
(CADC 2014). Demand-response incentive payments are
identical in substance.
The majority resists this elementary economic conclu-
sion (notwithstanding its own exhortation to “think back
to Econ 101,” ante, at 5). Why? Because its self-
proclaimed “common-sensical” view dictates otherwise.
Ante, at 22. Maybe the easiest way to see the majority’s
error is to take its own example: an airline passenger who
rejects a $300 voucher for taking a later flight. Consider
the following formulation of that example, indistinguish-
able in substance from the majority’s formulation. (Indis-
tinguishable because the hypothetical passenger has
exactly the same options and outcomes available to him.)
Suppose the airline said to the passenger: “We have proac-
tively canceled your ticket and refunded $400 to your
account; and because we have inconvenienced you, we
have also deposited an extra $300. The money is yours to
use as you like. But if you insist on repurchasing a ticket
on the same flight, you must not only pay us $400, but
return the $300 too.” Now what is the effective price of
the ticket? Sometimes an allegedly commonsensical intui-
tion is just that—an intuition, often mistaken.
Moving closer to home, recall that demand-response
participants must choose either to purchase a unit of
energy at the prevailing retail price (say $10) or to with-
hold from purchasing that unit and receive instead an
6 FERC v. ELECTRIC POWER SUPPLY ASSN.
SCALIA, J., dissenting
incentive payment (of say $5). The two options thus pre-
sent a choice between having a unit of energy, on the one
hand, and having $15 more in the bank, on the other. To
repeat: take the energy, be $15 poorer; forgo the energy, be
$15 richer. Is that not the very definition of price? See
Black’s Law Dictionary 1380 (10th ed. 2014) (“[t]he
amount of money or other consideration asked for or given
in exchange for something else”). In fact, is that not the
majority’s definition of price? Ante, at 21 (“the amount of
money a consumer will hand over in exchange for power”).
In any event, the majority appears to recognize that the
effective price is indeed $15—just as the effective price of
the airline ticket in the hypothetical is $700. Ante, at 22–
23, n. 9. That recognition gives away the game. For
FERC is prohibited not just from directly setting or modi-
fying retail prices; it is prohibited from regulating retail
sales, no matter the means. Panhandle Eastern Pipe Line
Co., supra, at 517. Whether FERC sets the “real” retail
price (to use the majority’s idiosyncratic terminology, ante,
at 23, n. 9) or the “effective” retail price is immaterial;
either way, the rule—by design—induces demand-
response participants to forgo retail electric-energy pur-
chases they otherwise would have made. As noted, even
FERC conceded that offering credits to retail customers
would impermissibly regulate retail sales. The majority
blithely overlooks this concession in favor of its own my-
opic view of retail pricing—all the while evading the incon-
venient fact that fiddling with the effective retail price of
electric energy, be it through incentive payments or hypo-
thetical credits, regulates retail sales of electric energy no
less than does direct ratesetting.
C
The majority cites dicta in several of our opinions ex-
pressing the assumption that state jurisdiction and federal
jurisdiction under FERC cover the field, so that there is no
Cite as: 577 U. S. ____ (2016) 7
SCALIA, J., dissenting
regulatory “gap”; one entity or the other “must have juris-
diction to regulate each and every practice that takes
place in the electricity markets.” Ante, at 27. The cases
that express such a principle, with respect to the Federal
Power Act and its companion the Natural Gas Act, base it
(no surprise) on legislative history. See, e.g., FPC v. Loui-
siana Power & Light Co., 406 U.S. 621, 631 (1972); FPC v.
Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 19
(1961); Panhandle Eastern Pipe Line Co., 332 U.S., at
517–518, and n. 13. One would expect the congressional
proponents of legislation to assert that it is “comprehen-
sive” and leaves no stone unturned. But even if one is a
fan of legislative history, surely one cannot rely upon such
generalities in determining what a statute actually does.
Whether it is “comprehensive” and leaves not even the
most minor regulatory “gap” surely depends on what it
says and not on what its proponents hoped to achieve. I
cannot imagine a more irrational interpretive principle
than the following, upon which the majority evidently
relies:
“[W]hen a dispute arises over whether a given trans-
action is within the scope of federal or state regulatory
authority, we are not inclined to approach the prob-
lem negatively, thus raising the possibility that a ‘no
man’s land’ will be created. That is to say, in a bor-
derline case where congressional authority is not ex-
plicit we must ask whether state authority can practi-
cably regulate a given area and, if we find that it
cannot, then we are impelled to decide that federal
authority governs.” Transcontinental Gas Pipe Line
Corp., supra, at 19–20 (citation omitted).
That extravagant and otherwise-unheard-of method of
establishing regulatory jurisdiction was not necessary to
the judgments that invoked it, and should disappear in the
Court’s memory hole.
8 FERC v. ELECTRIC POWER SUPPLY ASSN.
SCALIA, J., dissenting
Suppose FERC decides that eliminating the middleman
would benefit the public, and therefore promulgates a rule
allowing electric-energy generators to sell directly to retail
consumers across state lines and fixing generation, trans-
mission, and retail rates for such sales. I think it obvious
this hypothetical scheme would be forbidden to FERC.
Yet just as surely the States could not enact it either, for
only FERC has authority to regulate “the transmission of
electric energy in interstate commerce.” 16 U.S. C.
§824(b)(1); see also New York, 535 U.S., at 19–20. Is this
a regulatory “gap”? Has the generator-to-consumer sales
scheme fallen into a regulatory “no man’s land”? Must
FERC therefore be allowed to implement this scheme on
its own? Applying the majority’s logic would yield nothing
but “yesses.” Yet the majority acknowledges that neither
FERC nor the States have regulatory jurisdiction over this
scheme. Ante, at 27, n. 10. Such sales transactions, in-
volving a mix of retail and wholesale players—as the
demand-response scheme does—can be regulated (if at all)
only by joint action. I would not call that a “problem,”
ante, at 26; I would call it an inevitable consequence of the
federal-state division created by the FPA.
The majority is evidently distraught that affirming the
decision below “would . . . extinguish the wholesale de-
mand response program in its entirety.” Ante, at 27.
Alarmist hyperbole. Excluding FERC jurisdiction would
at most eliminate this particular flavor of FERC-regulated
demand response. Nothing prevents FERC from tweaking
its demand-response scheme by requiring incentive pay-
ments to be offered to wholesale customers, rather than
retail ones. Brief for Respondent Electric Power Supply
Assn. (EPSA) et al. 47–48; Brief for Respondents Midwest
Load-Serving Entities 10–11. And retail-level demand-
response programs, run by the States, do and would con-
tinue to exist. See Brief for Respondent EPSA et al. 46–
47; Brief for Respondents Midwest Load-Serving Entities
Cite as: 577 U. S. ____ (2016) 9
SCALIA, J., dissenting
6–11. In fact Congress seemed to presuppose that States,
not FERC, would run such programs: The relevant provi-
sions of the Energy Policy Act of 2005, 119 Stat. 594 et
seq., are intended “to encourage States to coordinate, on a
regional basis, State energy policies to provide reliable and
affordable demand response services.” §1252(e)(1), id., at
965, codified at 16 U.S. C. §2642 note (emphasis added).
That statute also imposes several duties on the Secretary
of Energy to assist States in implementing demand-
response programs. §§1252(e)(2), (e)(3), 119 Stat. 965–
966. In context, §1252(f) of the 2005 Act is therefore best
read as directing the Secretary to eliminate “unnecessary
barriers” to States’ adopting and implementing demand-
response systems—and not, as the majority contends,
as “praising wholesale demand response” systems to be
deployed and regulated by FERC, ante, at 9 (emphasis
added).
Moreover, the rule itself allows States to forbid their
retail customers to participate in the existing demand-
response scheme. 18 CFR §35.28(g)(1)(i)(A); see Brief for
Petitioner in No. 14–840, at 43. The majority accepts
FERC’s argument that this is merely a matter of grace,
and claims that it puts the “finishing blow” to respondents’
argument that 16 U.S. C. §824(b)(1) prohibits the scheme.
Ante, at 25. Quite the contrary. Remember that the
majority believes FERC’s authority derives from 16
U.S. C. §§824d(a) and 824e(a), the grants of “affecting”
jurisdiction. Yet those provisions impose a duty on FERC
to ensure that “all rules and regulations affecting or per-
taining to [wholesale] rates or charges shall be just and
reasonable.” §824d(a) (emphasis added); see §824e(a)
(similar); Conway Corp., 426 U.S., at 277–279. If induc-
ing retail customers to participate in wholesale demand-
response transactions is necessary to render wholesale
rates “just and reasonable,” how can FERC, consistent
with its statutory mandate, permit States to thwart such
10 FERC v. ELECTRIC POWER SUPPLY ASSN.
SCALIA, J., dissenting
participation? See Brief for United States as Amicus
Curiae 20–21, in Hughes v. Talen Energy Marketing, LLC,
No. 14–614 etc., now pending before the Court (making an
argument similar to ours); cf. New England Power Co. v.
New Hampshire, 455 U.S. 331, 339–341 (1982). Although
not legally relevant, the fact that FERC—ordinarily so
jealous of its regulatory authority, see Brief for United
States as Amicus Curiae in No. 14–614 etc.—is willing to
let States opt out of its demand-response scheme serves to
highlight just how far the rule intrudes into the retail
electricity market.
II
Having found the rule to be within FERC’s authority,
the Court goes on to hold that FERC’s choice of compen-
sating demand-response bidders with the “locational
marginal price” is not arbitrary and capricious. There are
strong arguments that it is. Brief for Robert L. Borlick
et al. as Amici Curiae 5–34. Since, however, I believe
FERC’s rule is ultra vires I have neither need nor desire to
analyze whether, if it were not ultra vires, it would be
reasonable.
* * *
For the foregoing reasons, I respectfully dissent.