Appeals Court Throws Out Energy Saving Rule

The D.C. Circuit Court of Appeals nullified a 2011 order by the Federal Energy Regulatory Commission that promoted paying businesses to reduce electricity consumption during heavy times of demand. The court ruled that as a federal regulator FERC had gone too far, encroaching in retail electricity markets that are under the exclusive jurisdiction of states.

The FERC order was considered integral to federal efforts to curb carbon emissions from power plants and support energy-efficiency investments by big consumers, from grocery store chains to aluminum manufacturers. But electricity suppliers struggling against low power prices and lackluster demand said those payments had become excessive.

The Electric Power Supply Association filed the lawsuit on behalf of power generators that sell electricity into wholesale markets regulated by FERC. The group's executive director John Shelk praised the court's ruling, saying it "vindicates what we and so many others said about this ill-advised order all along."

There is a proper role for demand response programs, but it must be compensated appropriately, Mr. Shelk said.

While the court ruling doesn't eliminate these programs, it is expected to significantly reduce the size of payments many participants receive. Lower payments will discourage customers from investing in automated equipment that help control and reduce energy use.

A FERC spokeswoman said the agency is reviewing the decision and considering next steps.

The rule vacated on Friday--Order 745—was intended to give energy consumers equal standing with power generators in deregulated wholesale energy markets.

When a company uses power, the units of electricity are measured in megawatts. In recent years, federal officials have tried to create legal standing for so-called "negawatts." It is a way to quantify and give a market value to electricity that conservation-minded businesses didn't pull off the power grid during times of peak energy demand.

With FERC's blessing, companies like publicly traded EnerNOC Inc. ENOC -0.49% have proliferated, rounding up companies and industrial users willing to slash their power consumption in exchange for special payments. FERC's order boosted the size of the negawatt payouts.

If negawatts are offered at a lower price than actual megawatts of electricity, market officials can use them as a resource to satisfy the grid's electricity needs. Power generators called that system unfair. They need to run actual power plants to participate the market, while it doesn't cost an energy consumer anything to forego power use, they argued.

Although the court didn't directly rule on negawatt prices paid to consumers, it said payments looked like a "potential windfall" for allowing customers to collect sums of money comparable to what electricity generators get for actually providing power, which the court inferred had a higher value.

Experts called the ruling a huge setback for consumers and energy conservation.

John Moore, senior attorney for the Natural Resources Defense Council in Chicago, said the FERC order gave energy consumers clout in markets that historically have been dominated by power generators.

Jon Wellinghoff, who was chairman of FERC when the order was created, said he was surprised by the court and the impact will be felt by customers. "We didn't believe it would go this way," he said.

Write to Rebecca Smith at rebecca.smith@wsj.com