During the last several years, the market share of demand response (DR) resources in the organized wholesale electricity markets has nearly doubled – from 17,146 megawatts to over 31,000 megawatts since 2006.1 In 2010, the Federal Energy Regulatory Commission (FERC) continued its efforts (in conjunction with ISOs/RTOs) to promote the continued integration of DR resources in the organized wholesale electricity markets. FERC’s efforts are in part based on its statutory obligations to ensure competitive markets. Also driving these advances is a clear policy belief that DR resources are – and will continue to be – a vital component of a rational wholesale electricity market and the “greening” of the market.
Gregory K. Lawrence, Partner
McDermott Will & Emery LLP
(Contributing Editor)
In 2008 FERC took a significant step by issuing Order No. 719 to eliminate barriers to DR participation in the organized ISO/RTO markets.2 Among other reforms, Order No. 719 required system operators to accept bids from qualified DR resources seeking to provide ancillary services and eliminated deviation charges during system emergencies for purchasers taking less energy in real-time than was purchased day-ahead.3 Order No. 719 also permitted the aggregation and direct bidding of retail customers into the market unless otherwise prohibited by state or local law.4
Over the past year, FERC has taken several additional steps in support of increased DR participation in organized markets – including the issuance of its National Action Plan on Demand Response and the initiation of proceedings to examine how DR resources should be compensated for their services. FERC has also continued to demonstrate that it will monitor DR resources as vigilantly as it monitors conventional resources in terms of compliance with all FERC-approved market rules and regulations, including FERC’s antimanipulation regulations.
National Action Plan on Demand Response
Consistent with its obligations under The Energy Independence and Security Act of 2007 (EISA), FERC issued its National Action Plan on Demand Response (National Action Plan) on June 17, 2010.5
Although the National Action plan is intended to be a plan for the entire country, FERC recognized that it will need to be implemented by states, localities and regions through coordinated effort. The National Action Plan is designed to achieve three main objectives: (1) assistance to states in the direction of developing and deploying DR resources, (2) a national communications program, and (3) the development or identification of analytical tools, information, model regulatory provisions, model contracts and other support materials for use by customers, states, and DR providers.6
In developing the plan, FERC solicited and received comments and participation from a vast number of diverse stakeholders. Before releasing the final plan, FERC issued a Discussion Draft on Possible Elements for the National Action Plan,7 released a draft of the plan for public comment,8 and held a web-based technical conference. FERC accepted written comments throughout this process, which came from industry stakeholders, governing officials, state regulatory utility commissioners, and nongovernmental groups including trade associations.
The National Action Plan calls for the formation of a coalition by public institutions and private sector organizations to achieve the objects outlined in the plan. The public-private coalition would coordinate the efforts of state and local officials, utilities and DR providers, regional market operators, consumers and the federal government. FERC staff is working together with the U.S. Department of Energy to develop an implementation proposal.
Notice of Proposed Rulemaking on Compensation for Demand Response
On March 18, 2010, FERC issued a Notice of Proposed Rulemaking (NOPR) aimed at ensuring adequate compensation for DR resources participating in organized wholesale electricity markets. FERC noted that DR helps improve the functioning and competitiveness of organized wholesale energy markets by lowering prices, limiting generator market power, and supporting system reliability, resource adequacy, and resource management challenges surrounding the unexpected loss of generation.9
The NOPR focused considerable attention on the ability of retail and commercial customers to bid directly into organized wholesale energy markets. FERC also cited its concern that current compensation levels have negatively affected the deployment of DR resources in organized wholesale energy markets as a primary basis for issuing the NOPR. FERC’s NOPR proposes to require RTOs/ISOs that allow for DR participation in their tariffs, to pay DR resources the locational marginal price (LMP), during all hours for demand reductions made in response to price signals.
FERC sought comments on several issues including: (1) whether a reduction in consumption is comparable to an increase in electricity production for purposes of balancing supply and demand; (2) whether DR providers and generators should receive comparable compensation; (3) whether paying LMP to DR resources is more or less than comparable to compensation paid to generation in RTO/ISO markets; (4) whether payment should apply to all hours, and if not, the criteria that should be applied for establishing the hours when LMP should apply; and (5) whether payment of LMP to DR resources should be required across all ISOs and RTOs.
On August 2, 2010 FERC issued a Supplemental NOPR in response to several issues raised by parties commenting on the initial NOPR. Specifically, the Supplement NOPR sought comments on: (1) whether FERC should adopt a net benefits test for determining when to compensate DR resources, what, if any, requirements should apply to the method for determining net benefits; and (2) what, if any, requirements should apply to how the costs of DR are allocated. Comments advocating the net benefits test focused ensuring DR resources only receive payments up until the point when the incremental payment for DR equals the incremental benefits of the reduction in load. Commenters also requested FERC address the issues of cost-allocation methods and demand response compensation simultaneously, arguing that the two issues are inextricably entwined.
FERC held a technical conference in September (2010) regarding the issues raised in both the NOPR and Supplemental NOPR. A significant number of comments were submitted in response to the conference, including those by market administrators that may be responsible for implementing changes following issuance of a final rule.
Enforcement Actions
In 2010 FERC also demonstrated its commitment to investigate and sanction market participants who FERC suspects of engaging in fraudulent activities within demand response markets. On October 28, 2010, FERC approved a settlement between its Enforcement Staff and North American Power Partners (NAPP) for violations of the anti-fraud rule in addition to violations of various PJM Interconnection, LLC (PJM) tariff provisions. NAPP agreed to pay a civil penalty of $500,000, disgorge profits of $2,258,127, and undertake compliance monitoring activities.10 The NAPP settlement confirms FERC’s belief that its anti-fraud regulation authority extends to resource agents operating in demand response programs administered by RTOs/ISOs.
According to Enforcement Staff, NAPP offered unavailable resources into a PJM market and failed to inform the resources of DR events. Additionally, FERC found NAPP overstated peak load contributions of its registered resources serving as demand response capacity in PJM. Finally, FERC found that NAPP registered 101 resources prior to obtaining the resource’s authorization or verification of their willingness and ability to participate in the program in advance of the registration deadline for the 2008/09 planning season.
FERC also commenced an audit of a demand response aggregator participating in several markets to evaluate its compliance with applicable market rules and tariffs. FERC’s Order No. 676-F is further confirmation of FERC’s determination to maintain the integrity of DR programs by requiring each organized market to incorporate into its tariff the Measurement and Verification standard adopted by the North American Energy Standards Board (NAESB).
What to Watch For in 2011
Industry participants and market administrators are eagerly awaiting FERC’s issuance of a final rule regarding how DR resources should be compensated. If FERC is successful in its stated goal of appropriately compensating DR resources, then deployment of these resources should increase significantly. However, many market participants are concerned that a one-size-fits-all approach with respect to implementation and cost allocation could result in unintended negative incentives.
Attention should also be paid to FERC’s November 18, 2010, rulemaking to address the integration of variable energy resources (VERs).11 FERC notes the importance of utilizing DR resources to provide grid flexibility as a means of integrating VERs into transmission grids. Comments to FERC’s VER NOPR are due in early March 2011.
About the Author
Gregory K. Lawrence is a partner in the Energy and Commodities advisory group, and leads the Renewable Power practice area of global law firm McDermott Will & Emery. (See mwe.com/green) Mr. Lawrence focuses his practice on regulatory proceedings, market structure and trading, project development and contract negotiations relating to the wholesale and retail electricity and natural gas industries.
Additional Contributors
Terence Healey, Partner and Ben Chesson, Associate, each members of McDermott’s energy group, provided significant contributions to this article.
1 Fed. Energy Regulatory Comm’n, Comm’n Staff, National Action Plan on Demand Response 7 (2010) [hereinafter National Action Plan].
2 Wholesale Competition in Regions with Organized Electric Markets, 18 C.F.R. § 35 (2008).
3 Id.
4 Id.; Wholesale Competition in Regions with Organized Electric Markets, 18 C.F.R. § 35 (2009).
5 Energy Independence and Security Act of 2007, Pub. L. No. 110-140, § 529, 121 Stat. 1492, 1664 (2007) (to be codified at National Energy Conservation Policy Act, 42 U.S.C. §§ 8241, 8279).
6 Id.
7 Fed. Energy Regulatory Comm’n, Comm’n Staff, Possible Elements of A National Action Plan on Demand Response (2009).
8 Fed. Energy Regulatory Comm’n, Comm’n Staff, Draft for Comment of the National Action Plan on Demand Response (2009).
9 Demand Response Compensation in Organized Wholesale Energy Markets, 75 Fed. Reg. 15362 (proposed March 18, 2010) (to be codified in 18 C.F.R. pt. 35).
10 North America Power Partners, 133 FERC ¶ 61,089 (2010).
11 Integration of Variable Energy Resources, 75 Fed. Reg. 17336 (issued November 18, 2010) (to be codified in 18 C.F.R. pt. 35).
