The SCOTUS FERC Case Appears to be a Proxy War Over the Commerce Clause

by Michael Dorf

Real proxy wars can be extremely dangerous. Great powers with conflicting interests fight proxy wars rather than directly engaging each other militarily because they realize the disaster that could ensue in the latter case. But where the great powers provide close support for their proxies, they risk direct engagement. Such is the potentially existential risk to nearly all life on Earth now playing out in Syria as Russian planes attack anti-Assad forces that are backed by the U.S. and other western powers. Thus, one hopes that loose talk by presidential candidates about shooting down Russian jets over Syria is simply talk.

Whereas the prospect of World War III is terrifying, metaphorical proxy wars conducted at the Supreme Court are, well, only metaphorical. But interesting nonetheless.

On Monday the Supreme Court heard oral argument in FERC v. Electric Power Supply Ass'n. As I shall explain, the case involves arguments that appear to be proxies for a longstanding argument over the meaning of the Commerce Clause. To oversimplify an extraordinarily complex body of statutory, regulatory, and judge-made law that is in play, the case involves the question whether FERC--the Federal Energy Regulatory Commission--exceeded its statutory mandate in regulating a set of transactions that it calls a "wholesale demand response regime."

By law, FERC can regulate the interstate wholesale market for electricity but not the retail market, which is left to state regulation. The challenged FERC regulation governs a series of transactions by which power companies pay consumers not to consume electricity beyond a specified cap during periods of peak demand, with the payments coming from savings obtained via discounts in the wholesale market. Those discounts in turn arise from the fact that with demand reduced, energy intermediaries do not need to purchase additional energy from high-marginal-cost producers. FERC contends that the consumers who take advantage of these payments (basically by sweating out heat waves rather than turning on the AC) are participating in the wholesale market rather than the retail market and thus regulable by FERC. The power companies challenging the reg say that the consumers are, well, consumers, and it is only by sleight of hand that they are made to appear in the wholesale market. They say that the program works in effect as a rate cut in the retail market.

During the oral argument, Solicitor General Verrilli gamely tried to defend the characterization by thrusting and parrying hypotheticals. Here's one of his: "if I go out and buy a Ferrari for $100,000, everybody thinks that the price of the Ferrari is $100,000.  Nobody thinks tha the price of the Ferrari is actually $107,000 because I'm forgoing the $7,000 tax credit I could get if I bought an electric car." To which the Justices who gave the SG the hardest time said, more or less: "Oh come on. Everyone knows that despite the obvious impact in the wholesale market--because retail prices and wholesale prices are related--this is functionally a system to reduce retail demand through rebates, and thus a regulation of retail."

Who were the Justices giving the SG a hard time? Chief Justice Roberts and Justices Scalia and Kennedy. We can assume that Justice Thomas (who was characteristically silent) was of a similar view, but Justice Alito is recused, leaving the possibility of a 4-4 affirmance by an equally divided Court. Of the remaining Justices, Breyer, Sotomayor, and Kagan asked questions suggesting that they would uphold FERC authority. Justice Ginsburg did not say anything but given the apparent ideological breakdown, she's a likely vote in the latter group. Post-argument speculation focused on whether Justice Kennedy might write a narrow opinion ruling against FERC on the ground that its reg was procedurally deficient but not necessarily substantively impermissible.

I'm sure that the case raises all sorts of important questions in energy law and policy, but here I want to focus on the question of why it seems to be breaking on ideological lines. One partial answer is that the conservatives generally look less favorably on regulation than the liberals do, but that's only a partial answer because in many contexts Justice Scalia is quite deferential to regulation as a matter of administrative law--and here FERC claims that it is entitled to Chevron deference. Thus, I would suggest that the case is a kind of administrative law proxy war over the constitutional question of the meaning of the Commerce Clause.

Let me be clear what I don't mean by that. I don't think that any of the conservative Justices, except possibly Justice Thomas, doubts that Congress could empower FERC to regulate retail energy prices. There is a robust interstate energy market, and retail purchases--even of power produced intrastate--affect the interstate market. This is a no-brainer. Under the modern cases, even after the "federalism revolution," Congress can regulate the economic activity of purchasing energy at retail. Thus, when I say that the case is a proxy for a fight about the Commerce Clause I don't mean that there's something like constitutional avoidance going on here. Rather, the Justices seem to see the case as presenting a question that is analogous to the question of the scope of congressional power under the Commerce Clause.

Here's how: The Commerce Clause sets forth one of Congress's enumerated powers but the 10th Amendment reserves to the States the power to regulate those matters that fall outside of Congress's enumerated powers. If Congress can regulate all human activity or inactivity under the Commerce Clause, the conservatives say, then the 10th Amendment--and the Framers' strategy of limiting the federal government by enumerating its powers--fails. Here is CJ Roberts expressing the point in the 2012 Obamacare Case by quoting a landmark Marshall Court opinion: "The enumeration of powers is also a limitation of powers, because '[t]he enumeration presupposes something not enumerated.' Gibbons v. Ogden (1824).

The statutory limit on FERC does not divide federal power over interstate commerce from state power over whatever is not interstate commerce (or covered by some other enumerated power of Congress). Instead, it gives FERC power over wholesale while reserving to states power over retail. Yet CJ Roberts worried about the exact same consideration that troubled him (and the other four conservative/states'-rights-favoring Justices) in the Obamacare Case: whether accepting the government's assertion of power would leave any residual power in the states. Here is what he said to SG Verrilli on Wednesday: "you have to have some sort of limiting principle, otherwise FERC can do whatever it wants."

With respect to the meaning of the Commerce Clause, the liberal/nationalist response to the objection that a broad definition of federal power begins by arguing that while the meaning of "commerce . . . among the several States" has not changed since 1789, the transformation from a craft and agraraian economy to an industrial, then global post-industrial economy in the intervening period entails that there really are very few activities (and maybe even inactivities) today that are not inextricably linked to interstate commerce. In this view, fidelity to the words the Framers chose has the collateral consequence of undermining the strategy of enumeration, but a modern expansive reading of the Commerce Clause nonetheless is a faithful reading of it.

Justice Kennedy pushed back against the FERC analogue of this argument a bit very early in Wednesday's argument, when he suggested that lines that modern economics recognizes as artificial may nonetheless be legally required. He said:
If there were a student in Economics I, it seems to me that he would conclude and his professor would conclude that wholesale affects retail, retail affects wholesale, they're interlinked, which means you win the case, except that the statute makes a distinction. We have to make a distinction. Can you tell us what the distinction is that marks the end of Federal power and the beginning of local power?
Justice Kennedy is expressly asking about the difference between wholesale and retail under the statute giving FERC authority but he could as easily be asking about congressional power under the Commerce Clause. He would be (and in some sense is) saying that despite the fact that modern economic facts make the distinction between interstate commerce and everything else illusory, the Court still must draw some line in order to make sense of enumeration and the Tenth Amendment.

The liberals/nationalists have two sorts of responses to that claim. The first simply denies it. There is nothing illogical, they say, about reserving to the States a regulatory domain that shrinks to nothing over time. That is simply a consequence of having a very old Constitution.

This seems to me a better answer with respect to the Commerce Clause than with respect to the FERC statute, which, after all, is of much more recent vintage. Congress amended the relevant statutory provisions as recently as 2007. Thus, whereas one can plausibly say that fidelity to the Commerce Clause despite dramatically changed circumstances can lead to concrete results that might have surprised the Framers, it is much less plausible to say that there have been similarly dramatic and relevant changes in the energy market since the last time Congress considered, and decided to retain, the distinction between wholesale and retail.

The liberals/nationalists have another answer in the Commerce Clause context: They can say that if they are unable to come up with a clear limiting principle, perhaps that means that the Constitution commits to Congress the decision whether to regulate in a field that, in days of yore, might have been regarded as reserved to the States. As Herbert Wechsler famously argued (and as the Court has sometimes accepted), the Constitution includes "political safeguards" in the national political process to protect the interests of States.

But that is also an answer that works better for the liberals/nationalists with respect to the Commerce Clause than it does with respect to the scope of FERC authority--where it appears to work not at all. After all, here the political safeguards appear to have done their job: Congress could have chosen to give FERC power over retail as well as wholesale energy, but reserved the former for the states. If one is going to say that an expansive Commerce Clause is permissible because political safeguards will prevent Congress from pushing to the edge of its power, then one has some obligation to give teeth to those statutory protections that Congress enacts for the benefit of the States.

Accordingly, I conclude that insofar as the FERC case is a proxy for a fight over the meaning of the Commerce Clause, the conservatives/states'-rights-favoring Justices have a stronger argument in the FERC context than in the Commerce Clause context. It's still possible to argue that the government should win in FERC, but it does seem that to do so successfully one should indeed have to be able to provide the sort of limiting principle that CJ Roberts and Justice Kennedy demand.