WASHINGTON—The Supreme Court on Monday upheld the federal government's ability to spur incentives for industrial businesses, schools and other large energy consumers to reduce energy usage at times of peak demand.

The court, in a 6-2 ruling by Justice Elena Kagan, said the Federal Energy Regulatory Commission acted within its powers in a 2011 order that required wholesale electricity market operators to pay higher levels of compensation to power customers that agreed to reduce their electricity use.

The decision is a notable and somewhat surprising win for the federal energy regulator, as well as for environmentalists that supported the commission's efforts.

When the Supreme Court heard oral arguments in October, conservative justices voiced skepticism about the FERC rule. On Monday two conservatives—Chief Justice John Roberts and Justice Anthony Kennedy—joined with the court's four liberal justices in ruling for the commission.

The decision reversed a federal appeals court ruling from 2014 that invalidated the FERC order.

FERC said its rule provided fairness in wholesale electricity markets and reduced the prospect of blackouts and brownouts when the nation's power grid becomes strained. It also said the rule produced billions of dollars in consumer benefits by reducing wholesale electricity costs that consumers bear.

Jon Wellinghoff, former FERC chairman when the commission issued the 2011 rule, said the decision makes energy-control technology more valuable "and allows you to use it, not only to reduce your own costs but to get additional value by selling your services to a larger market or allowing someone else to sell it for you."

The Supreme Court's decision was a loss for power generators and utilities that accused FERC of unlawfully distorting energy markets and suppressing demand for the electricity they sell.

Shares of big power sellers including NRG Energy Inc., Dynegy Inc. and Calpine Corp. dropped sharply after the ruling. EnerNOC Inc., which provides energy management and conservation services, shot up more than 65% on the decision.

The incentives come into play during high-demand periods on some regional markets, where wholesale market operators, which are often nonprofits, match buyers and sellers of electricity.

At times of peak demand it is costly for electricity generators to increase supply, so wholesale market operators sometimes pay large energy consumers such as industrial companies and large retailers to cut their use instead. The FERC rule seeks to regulate and stimulate that process.

Under the rule, organized energy markets such as giant PJM Interconnection, which serves 13 Eastern and Midwestern states, are required to let consumers reduce their energy demand in exchange for payments comparable to what power generators would have received to provide a similar amount of power.

A key legal question in the case stemmed from the dual nature of electricity regulation. FERC regulates at the wholesale level, while the states regulate retail electricity markets.

Industry challengers argued FERC's rule intruded on the domain of the states because the commission was targeting retail electricity use, even if the rule itself applied only on wholesale markets.

Justice Kagan, writing for the court's majority, rejected that argument. She said FERC rules invariably will have some effect on retail electricity markets, but that didn't make them unlawful.

"FERC set the terms of transactions 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 [Federal Power Act] contemplates," Justice Kagan wrote.

Justices Antonin Scalia and Clarence Thomas dissented, saying they believed FERC's efforts wrongly focused on retail-level energy consumption.

The decision came on a day when the Supreme Court opened for business while the rest of the federal government was shut down in Washington after a weekend blizzard.

FERC Chairman Norman Bay said the ruling "means that consumers will continue to see the significant benefits of demand response, which enhances competition in the markets, reduces wholesale prices and helps make the grid more reliable."

The Environmental Defense Fund, one of several environmental groups that supported FERC, said the court's ruling was "a major victory for customer-friendly, clean, low-cost and reliable energy."

John Shelk, president and CEO of the Electric Power Supply Association, a lead plaintiff in the lawsuit, had no immediate comment.

Justice Samuel Alito was recused in the case. As is custom at the court, he didn't announce the reason for his recusal, though his non-participation appeared necessitated by his family's stock holdings.

--Amy Harder contributed to this article.

Write to Brent Kendall at brent.kendall@wsj.com and Rebecca Smith at rebecca.smith@wsj.com

 

(END) Dow Jones Newswires

January 25, 2016 15:45 ET (20:45 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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