New York Times

The Supreme Court on Monday ruled that federal regulators may encourage electricity users like schools, hospitals and shopping centers to reduce consumption at peak times in exchange for price breaks. The regulatory approach, known as “demand response,” lowers costs for consumers and lessens the risk of system failures that can cause blackouts.

“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,” Justice Elena Kagan wrote for the majority in the 6-to-2 decision.

Environmental groups welcomed the ruling. “Demand response programs make energy cheaper, ensure the reliability of the grid, and protect our air and water from fossil fuel pollution,” Casey Roberts, a lawyer with the Sierra Club, said in a statement.

Demand response cuts into the profits of companies that own power plants, which lose money when price spikes are avoided. Business groups and their supporters said the majority had ignored legal principles that should have constrained the regulator, the Federal Energy Regulatory Commission.

“The Supreme Court sends a clear message by ruling in favor of FERC’s power demand rule: Energy politics are a game that ignores both the rule of law and states’ constitutional authority,” Myron Ebell, director of the Center for Energy and Environment at the Competitive Enterprise Institute, a libertarian group, said in a statement.

The main legal question in the case was whether the commission had overstepped its authority. It oversees wholesale transactions under the Federal Power Act, but the states regulate retail transactions.

Trade groups representing utilities and power suppliers challenged the demand-response regulation, saying it operated at the retail level and so was beyond the reach of federal power.

Justice Kagan rejected that argument, saying that the regulation affected retail sales only incidentally.

“It is a fact of economic life that the wholesale and retail markets in electricity, as in every other known product, are not hermetically sealed from each other,” she wrote. “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.”

Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor joined the majority opinion.

Justice Kagan rejected a second argument from the challengers: that even if the commission had the authority to issue the regulation, it had acted arbitrarily in adopting it.

“The commission, not this or any other court, regulates electricity rates,” she wrote. “The disputed 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.”

“It is not our job to render that judgment, on which reasonable minds can differ,” Justice Kagan went on. “Our important but limited role is to ensure that the commission engaged in reasoned decision-making — that it weighed competing views, selected a compensation formula with adequate support in the record, and intelligibly explained the reasons for making that choice.”

Justice Antonin Scalia, joined by Justice Clarence Thomas, dissented. He said that Justice Kagan’s analysis had things backward.

“While the majority would find every sale of electric energy to be within FERC’s authority to regulate unless the transaction is demonstrably a retail sale,” Justice Scalia wrote, “the statute actually excludes from FERC’s jurisdiction all sales of electric energy except those that are demonstrably sales at wholesale.” That meant, he said, that the commission had exceeded its statutory authority.

When the case was argued in October, Justice Scalia said he had conflicting impulses.

“I like deregulated markets,” he said. “But the problem is, do you have the authority to do it?”

Justice Samuel A. Alito Jr. recused himself from the case, Federal Energy Regulatory Commission v. Electric Power Supply Association, No. 14-840, presumably because of a financial conflict.

Monday’s ruling overturned a 2014 decision from a divided three-judge panel of the United States Court of Appeals for the District of Columbia Circuit.

“Because FERC’s rule entails direct regulation of the retail market — a matter exclusively within state control — it exceeds the commission’s authority,” Judge Janice Rogers Brown wrote for the majority.

In dissent, Judge Harry T. Edwards said that the governing statute was ambiguous and that the commission’s understanding of the scope of its authority deserved deference.

Neither side adopted that ground on Monday. Both Justice Kagan and Justice Scalia said the statute was clear rather than ambiguous. But they disagreed about what it clearly said.