(Updates with comment from FERC in sixth paragraph.)
May 23 (Bloomberg) -- A federal regulator’s plan to pay smart-grid companies including Comverge Inc. and consumers such as Alcoa Inc. for using less electricity was struck down today by a U.S. appeals court, handing a victory to utilities that argued the system would discourage power-plant investment.
The majority of a three-judge panel of the U.S. Court of Appeals in Washington agreed with the Electric Power Supply Association, whose members included PPL Corp. and Exelon Corp., that a federal rule encouraging electricity conservation “goes too far, encroaching on the states’ exclusive jurisdiction to regulate the retail market.”
Under the rule, electricity users who cut consumption when prices and demand rise were paid the same amount as generators that produce electricity. The practice has been embraced because it can reduce the need to build additional expensive power plants and cut air pollution.
The decision is “a victory for generators and a loss for demand response,” said Paul Patterson, an analyst for Glenrock Associates LLC. Power producers view energy conservation as a “competitive threat” since it reduces demand and lowers revenue, Patterson said.
“We are reviewing the decision and are considering our next steps,” Tamara Young-Allen, a FERC spokeswoman, said in an e-mailed statement.
Grid operators in some of the six regions FERC oversees have encouraged the behavior, called demand response, since at least 2002. The pay varies among the six regions with FERC oversight.
Because the court also challenged the agency’s method for calculating the compensation due to demand-response providers, the ruling “will severely cramp any attempt to rehabilitate demand response at the federal level,” said William Scherman, a former FERC general counsel and now an attorney who leads the energy, regulation and litigation practice at Gibson, Dunn & Crutcher LLP in Washington.
The ruling may affect a pending rulemaking by the Environmental Protection Agency on greenhouse-gas emissions from power plants.
“It would be irresponsible for the EPA to move forward” with the rules without assessing the impact of the court’s demand-response decision on power markets going forward, Scherman said. The agency’s proposed rules are expected June 2.
Environmental groups called the court ruling a setback.
“Our nation’s strong interest in clean, reliable and customer-friendly power took a big step backward today with this unfortunate court decision,” John Finnigan, lead counsel for the Environmental Defense Fund, said in a statement. The group had filed a brief in defense of the FERC rule.
Energy consumers such as Alcoa, the biggest U.S. aluminum producer, favor FERC’s demand-response efforts because it may result in millions of dollars in energy savings.
Wal-Mart Stores Inc. the world’s largest retailer, and the U.S. arm of ArcelorMittal, the Luxembourg-based steelmaker, also supported FERC’s proposal for the plan when it was proposed.
Power-plant owners that opposed the FERC plan including Duke Energy Corp. said it was too generous. They said companies would be paid the full market price for energy they didn’t consume, and keep the savings from not using it -- creating, in effect, a subsidy.
The case is Electric Power Supply Association v. FERC, 11-1486, U.S. Court of Appeals, District of Columbia (Washington).
--With assistance from Brian Wingfield in Washington.