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State Regulators, Other Consumer Interests Share Concerns With Demand Response NOPR

Federal and state regulators, along with other consumer representatives, have submitted comments raising concerns with the Federal Energy Regulatory Commission's (FERC) proposal to set compensation for demand response (DR) in organized wholesale electricity markets. FERC proposes that these markets be required to pay DR the locational marginal price (LMP) in all hours. As highlighted below, these entities share EPSA's serious concerns over mandating uniform compensation across all organized markets (RTOs). These concerns include compensating DR resources at the full LMP in all hours without an offset and without clear parameters to protect against unnecessary subsidies for some customers at the expense of others. These comments are significant because the FERC proposal is intended to benefit consumers.

  • "In pure economic terms a reduction in demand is fundamentally different from an increase in supply.[] Demand reductions and supply increases are not only intuitively divergent, but treating them equivalently has material implications... The ICC believes that demand response should be incentivized and participants should be fairly compensated, but these comments show that they are not particularly comparable with generation supply." Illinois Commerce Commission, p. 2.


  • "...[D]emand response resources participating as suppliers in a RTO energy market may reduce the incentive for the implementation of retail rates which reflect wholesale prices. Furthermore, as the value of the subsidy increases, the state commission's likelihood of implementing time-differentiated retail rates decreases. It should be recognized that retail rates reflecting wholesale prices would be the most efficient means of allocating the scarce energy resources. The ICC recommends that the Commission recognize the implications of compensating demand response resources. Specifically, subsidizing demand reductions has the effect of decreasing the potential for retail rate reform." Illinois Commerce Commission, p. 14.


  • "The payment of the full LMP distorts consumer behavior and would result in inefficient decisions to curtail load. In addition, the subsidy would have to be recovered from non-participating customers... Ironically, state commissions would be faced with the task of revising retail rate structures in order to correct a price distortion created by a wholesale market pricing mechanism which was intended to improve price signals." Organization of MISO States (representing the 13 state regulatory commissions in the Midwest ISO footprint), p. 3-4.


  • "The PUCO believes that demand response resources should be fairly compensated and that there should be efficient incentives for the development of such resources. While the Ohio Commission has not specifically opposed RTO economic demand response programs that provided limited additional and temporary incentives to initiate development of demand response, the most appropriate payment for demand response resources in wholesale energy markets is LMP minus the generation portion of the retail rate. This is the economically efficient incentive for demand response resources in these markets. By reducing demand, the responding consumer is already avoiding payment for energy that was not consumed." Public Utilities Commission of Ohio, p. 3.



  • "The Ohio Commission is concerned that an over emphasis on providing incentives for demand response resources in wholesale energy markets could divert attention from and potentially retard the development of more efficient approaches. We believe that a primary focus should be on directly addressing barriers to demand participation, including existing RTO tariffs that require load serving entities to carry capacity for demand that would not be present at higher energy prices." Public Utilities Commission of Ohio, p. 4.


  • "We question the soundness of a policy that would pay companies the proceeds from the sale of power that they never bought in the first place. Such a policy would create situations in which a demand response provider would find it more profitable to sell its power rights (i.e., provide demand response) than to consume that power, even though the value to society of consuming that power exceeds the powers cost to society." Federal Trade Commission, p. 2.


  • "This concern about overcompensation is well founded. It is useful to view demand response as a provision that allows end-users to decide between consuming power themselves and reselling it. End-users have the appropriate incentives[] if they pay the same price for power that they consume and for power that they sell. If customers have to pay the retail price for power that they use but pay nothing for power that they resell, then they will have incentives to resell power in situations in which it would be more beneficial to society for them to consume it." Federal Trade Commission, p. 6.


  • "[I]t is unclear whether the NOPR provides an adequate record from which to conclude that the proposed payment method is the only just and reasonable compensation structure across all ISOs, RTOs states, regions, and local regulatory authority zones... [P]romulgating a uniform national rule at this time may inadvertently impede the implementation of the optimal demand response compensation for an individual ISO or RTO which addresses the needs of that particular region." Public Utilities Commission of the State of California, p. 5-6.


  • "PJMs analysis shows that paying demand response providers full LMP as an incentive for all hours would not benefit customers in general.[] However, PJM's analysis does show positive economic benefits for all customers when demand response providers receive incentive payments (full LMP) during at least the top 100 hours (the highest priced energy hours)... [A] one size fits all rule for compensating demand response may not be the most appropriate rule for achieving the laudable goal of rewarding private efforts that generate public savings. The Commission should recognize flexibility of compensation for demand response as a guiding principle behind any rule that intends to incentivize demand response. The Maryland PSC submits that the definition of a high cost period during which the full LMP incentive would be in effect should be defined by each ISO/RTO, and perhaps with recognition of subzones within a given ISO/RTOs footprint." Public Service Commission of Maryland, p. 4-5.


  • "The regulations at issue in this proceeding could result in the imposition of an undue burden on retail load serving entities [] and their customers, including District of Columbia retail ratepayers." Office of the People's Counsel of the District of Columbia, p. 1.


  • "JCA [Joint Consumer Advocates] submits it is critical that demand response that is paid LMP, or any compensation for that matter, must be subject to strict measurement and verification (M&V) requirements. It is relatively easy to count kilowatt-hours that come from a generating plant, but more difficult to measure demand and energy that is not used as a result of demand response. As a result, strict M&V requirements tied to demand response compensation are critical and necessary." Joint Consumer Advocates (Pennsylvania Office of Consumer Advocate; State of Connecticut - Office of Consumer Counsel; Office of the Ohio Consumers' Counsel; Maryland Office of People's Counsel), which supports full LMP only with strict M&V requirements, p. 1-2.


  • "The payment of LMP should not apply to all hours. Currently the [NYISO] DADRP program has a minimum bid threshold of $75/MWh. This static threshold limited participation in 2009 because prices did not get above the threshold on a consistent basis. A bid threshold is needed to limit free riders, customers who had intended to reduce electric consumption for reasons other than market prices and seek DR compensation for their actions. The New England Independent System Operator's DR program has a dynamic threshold based on fuel prices and heat rates of marginal generation. This solution addresses the issue of a static threshold and limits free riders, and would be supported by NYPSC." New York Public Service Commission, p. 10.


  • "The Commission should allow regional variation in compensation for DR. Each ISO/RTO is different and may have different needs that DR can address. Some regions may be able to address the need for DR through retail rates, and thus not need to continue a largely redundant wholesale DR program... The Commission has stated that retail-level price responsive demand is not the subject of this proceeding; the retail pricing situation, however, must be examined in order to determine if it will affect decisions about the proper design of wholesale market programs and incentives." New York Public Service Commission, p. 11-12.


  • "NECPUC supports the use of market price (i.e., full locational marginal price or "LMP") to compensate demand response resources in the wholesale energy market. However, the circumstances under which demand response resources are compensated at market price should be limited to those times when it provides net benefits to customers. An approach that balances the adequate compensation inherent in the market price while ensuring net benefits to customers will lead to just and reasonable rates. Limiting demand response participation in the wholesale market to those hours when it provides net benefits to customers may be achieved with the use of a threshold price, dynamically based upon a fuel cost index and a representative heat rate. When market price exceeds the participation threshold price, demand response resources will be adequately compensated and consumers will benefit from lower prices and greater reliability." New England Conference of Public Utilities Commissioners (representing the six state regulatory commissions in ISO-NE footprint), p. 3.


  • "[C]ompensation at market price should be limited to ensure net benefits to customers, mitigate price formation concerns, protect the integrity of customer usage baselines, and promote balance of wholesale and retail demand response resource participation. The details for implementing the limitation should be developed at the ISO/RTO level, and the costs for demand response resource participation should be allocated to its beneficiaries. The NECPUC threshold mechanism reasonably considers the interests of all market participants by balancing the market barriers faced by demand response resources and price formation concerns. Until a significant portion of retail customers experience dynamic rates, the approach suggested by NECPUC provides an avenue for demand response resources to meaningfully contribute to the vibrancy of the wholesale electric markets and improve reliability." New England Conference of Public Utilities Commissioners, p. 27-28.


  • "...Occidental is concerned that the proposed rule lacks an essential safeguard against excess payments for demand response, and therefore could create unintended, negative consequences for the market. Specifically, the NOPR leaves open the possibility that the market could, as illustrated below, pay twice - once indirectly and a second time directly - for precisely the same demand response... The potential for such a demand response "double dip" exists in any organized wholesale market where the NOPR's proposed compensation structure would operate in tandem with existing wholesale market imbalance provisions." Occidental Chemical Corporation and Occidental Permian Ltd., "a major retail electric consumer that actively develops, promotes and participates in demand response activities nationwide," p. 8.

State Regulators, Other Consumer Interests Share Concerns With Demand Response NOPR

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.