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EPSA Urges FERC to Adopt Appropriate Demand Response Compensation

"There is nothing in the NOPR to adequately support such a sweeping requirement in any one RTO, much less as the only pricing element to be standardized across all ISOs and RTOs. Subsidizing one set of market participants in the manner contemplated by the NOPR creates substantial inequalities that would harm the market and consumers, and would produce rates that are demonstrably unjust and unreasonable."

WASHINGTON, D.C. - The Electric Power Supply Association (EPSA) today filed detailed comments with the Federal Energy Regulatory Commission (FERC) on Demand Response Compensation in Organized Wholesale Energy Markets. The comments were accompanied by a second policy paper by Dr. William W. Hogan of Harvard University's Kennedy School of Government. EPSA's comments note the benefits of economic and efficient demand response (DR). EPSA's comments urge FERC to tailor demand response compensation to where and how it is needed to address specific market barriers. By contrast, FERC's proposed rulemaking would compensate all DR with full locational marginal pricing (LMP) in all hours regardless of the underlying market circumstances, thus amounting to "double dipping" in most cases.

The comments state that "EPSA strongly opposes payment of full LMP in all hours as the correct compensation for DR resources participating in ISO/RTO wholesale energy markets. There is nothing in the NOPR to adequately support such a sweeping requirement in any one RTO, much less as the only pricing element to be standardized across all ISOs and RTOs. Subsidizing one set of market participants in the manner contemplated by the NOPR creates substantial inequalities that would harm the market and consumers, and would produce rates that are demonstrably unjust and unreasonable." EPSA applauds FERC for welcoming diverse points of view when the proposed rulemaking was issued for comment on March 18, 2010.

Professor Hogan's paper on the proposed rule follows up on one filed last October in a related proceeding involving the PJM Interconnection. The new Hogan paper says, "The cost of payments made to participants in these demand response programs would be borne by consumers who are unable to participate in these programs. Consequently, these consumers would be asked to pay not only the cost of purchasing electricity for their own use, but also payments made to other consumers, which could induce those consumers to engage in strategies to move their consumption out of RTO- or ISO-administered markets, thereby creating the illusion of a reduction in consumption. These costs would be likely to fall disproportionately on smaller consumers." Professor Hogan argues that paying full LMP may be appropriate for some limited instances when consumers face "real-time prices and consumers that have explicit contracts purchasing a given quantity of electricity and then decided not to use some or all of the contracted amount that would be resold in the market."

While supporting economically efficient DR, EPSA's comments note that the proposal would "inappropriately - and inexplicably - standardize only one discrete pricing element;" incorrectly assumes that one megawatt of demand always equals one megawatt of supply; and focuses only on certain organized markets. EPSA's comments and the Hogan papers outline pricing alternatives that better achieve the proposed rule's goals while being consistent with FERC's responsibilities under the Federal Power Act to maintain reliable power supplies.

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.