The Supreme Court said Monday it will hear a dispute over a regulation that offers financial incentives to factories, retailers and other large electricity users to reduce their power consumption.

The justices agreed to review a lower court ruling that struck down a Federal Energy Regulatory Commission rule that requires utilities to pay energy consumers for lowering electricity use during times of peak demand.

The approach, known as demand response, has won praise from environmental advocacy groups that call it an effective tool for saving energy, lowering the cost of electricity and reducing air pollution. But utilities have opposed the regulation on grounds that it is too generous.

The U.S. Court of Appeals for the District of Columbia Circuit ruled 2-1 last year that the rule encroaches on state authority to regulate the retail power market. The appeals court said the rule covers the retail market because it involves retail customers and their decision whether to purchase at retail.

The Obama administration argues that the rule targets the wholesale market. The government says the effect of the rule on wholesale rates is more immediate and direct than any effect on retail consumption.

FERC regulates the wholesale energy market, while states regulate the retail market. FERC Chairman Norman Bay said in a statement he was pleased the Supreme Court will consider the case.

"The integration of demand response is important to the nation's competitive wholesale electricity markets and reliable electric service," Bay said.

The regulation itself remains in effect while the Supreme Court decides whether it's valid.