A pending Supreme Court case will determine if grid operators can “socialize electricity” by forcing energy companies to pay middlemen for electricity theoretically saved by consumers during times of peak demand. In essence, the policy, called “demand-side management” would artificially make green energy much more financially lucrative.
The case began in 2011 when the Federal Energy Regulatory Commission created a rule that established demand-side management (DSM). A U.S. Court of Appeals for the District of Columbia held that FERC did not have the statutory authority to impose DSM and that the rule was arbitrary and capricious, because FERC did not consider or respond to the arguments made in opposition to the rule.
FERC promptly pushed the case to the Supreme Court, where it was heard Oct. 14. How they decide could end up changing the face of modern American energy, experts say.
William Yeatman, a Senior Fellow specializing in energy markets at the libertarian Competitive Enterprise Institute, told The Daily Caller News Foundation via email:
Under the Obama administration, FERC has been pursuing policies to encourage demand-side management (DSM). DSM is a wholly contrived business based on the silly notion that it is more efficient for government to try to control demand by paying consumers not to use energy than it is for the market to control demand through a responsive price signal. If the agency wins, and federal authority is thus expanded, then it is likely that the Environmental Protection Agency would try to coopt this new federal authority by forcing states to implement DSM policy in the name of mitigating climate change.
DSM is the modification and adjustment of consumer demand through incentives, generally financial.
As a glowing review of the practice in The Washington Post explains, the price of power swings wildly depending on when the power is being used. DSM assigns a financial value to not using electricity at peak times. This encourages people and companies who can reduce their electricity consumption to make reductions in the amount of power they’re using, which puts less strain on the power grid while artificially making the amount of wind and solar power used appear to be higher.
Normally, the timing and magnitude of energy demand does not coincide with the limited availability and intermittent nature of renewables. (Wind power is only available when the wind is blowing and solar power is only available during certain times of the day.) Regulators then recoup those payments through increases in consumers’ rates, earning the companies which serve as the middleman billions of dollars.
“The way FERC approached the demand response question opens the door for companies to get paid for selling electricity they never bought. By not accounting for that huge flaw, FERC’s compensation scheme overpays participants and is a handout to demand response companies. That is why FERC’s plan was demolished point-by-point in an amicus brief by a group of academic economists and rejected by the Court of Appeals,” economist Travis Fisher of the Institute for Energy Research told the Daily Caller News Foundation.
Economists generally caution against DSM because it “creates a counterproductive demand response mechanism that produces economically undesirable behavior and wasteful outcomes that will injure consumers and society in the long run,” as an amicus curiae brief filed against FERC by leading Harvard economists states. Studies have shown that demand-side management generally results in higher electricity costs for consumers, which disproportionately harms the poor.
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