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Independent Market Operators And Monitors Are Troubled By FERC's Demand Response NOPR

Several independent market operators and the independent or internal market monitors which oversee their operation and competitiveness recently submitted comments raising concerns with the Federal Energy Regulatory Commission's (FERC) proposed rule to establish a generic compensation approach for demand response (DR) participating in organized wholesale electricity markets. FERC proposes that Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) be required to pay DR resources the full locational marginal price (LMP) without offsets in all hours in all cases. As highlighted below, several ISOs/RTOs and their respective Market Monitors share EPSA's serious concerns over mandating a uniform method of compensation across all RTOs. These concerns include compensating all DR resources at the full LMP in all hours without an offset, cost shifting to other consumers and load shifting behind the meter, among others. It is notable that the RTOs responsible for managing the energy markets and related DR programs, and the independent Market Monitors, who oversee these markets, share common concerns and are urging FERC to address them.

The Perspective of the Market Monitors

  • "[T]he result of the proposed implementation of this policy would be that demand side participants would receive the LMP plus the avoided cost of purchasing power... This proposal is inconsistent with fundamental economics and, if adopted by the Commission would over compensate participants in economic load response programs, negatively affect the efficient operation of the energy markets and provide no offsetting social benefit." Independent Market Monitor for PJM, p 2.


  • "The most basic barrier to a fully functional demand side of the market is that not all customers are exposed to the actual incremental cost of energy. The assertion that demand side participants should be paid full LMP, regardless of their retail tariff rate... cannot be correct. The entire demand side program exists only because of the disconnect between wholesale and retail rates. The assertion that the program design should not account for the details of the retail rate design leads to the conclusion that there should be no demand side program at all." Independent Market Monitor for PJM, p 5.


  • "In this response to the Commission's proposal, we have illustrated the importance of explicitly recognizing the retail settlements when structuring an efficient payment at the wholesale level for DR resources. We believe that recognition of differing retail rate structures may require flexibility by the Commission, rather than a one-size-fits-all approach to structuring DR settlement rules in each ISO market. Hence, we would encourage the Commission to establish guidelines for the ISOs that would be premised on maximizing economic efficiency, rather than requiring a specific DR payment scheme." Potomac Economics, LTD. (External Market Monitor or Independent Market Monitor for MISO, NYISO, ISO-NE and ERCOT), pp. 9-10.


  • "The ISO-NE [Internal Market Monitor] believes that adoption of the full-LMP proposal as written would decrease market efficiency, and result in preferential, non-comparable treatment of demand resources in relation to generating resources. This would artificially lower LMPs and reduce the effectiveness of the market in supporting new and existing resources. In addition, the proposal presents an inherent difficulty in determining whether demand reductions are genuine, and creates incentives for load-shifting behind the meters." ISO New England Inc. Internal Market Monitor, p. 7.


Views of RTOs/ISOs

  • "The approach to the payment for demand response providers that is set forth in the NOPR, requiring ISOs/RTOs to pay LMP without reflecting the virtual retail purchase of the commodity being sold at wholesale, will impose unnecessary costs on non-participating retail customers, create perverse incentives and slow the introduction of other innovative clean technologies by uneconomically suppressing real-time prices without any guarantee that the overpayment inherent in such a rate will foster further investment rather than act as a mere windfall." New York ISO, Inc., p. 3.


  • "[T]he direct payment of full LMP at the wholesale level would be the equivalent of providing these customers with a free option to sell power they never purchased at a full LMP market price." PJM Interconnection, L.L.C., p. 6.


  • "Paying full LMP to demand resources that have reduced consumption relative to an estimated baseline as required by the proposed rule will encourage the dispatch of higher-cost demand resources that will displace lower-cost generation in the wholesale energy markets. This is inefficient, runs counter to the fundamental least-cost resource dispatch procedure of the energy markets, and will ultimately raise consumer costs. ISO-NE developed these views after careful consideration informed by over 19 months of analysis and discussions with stakeholders and state regulators on the topic of achieving price-responsive demand in New England." ISO New England Inc., p. 2.


  • "[T]he Commission should consider a proposed rule change that would require ISOs/RTOs to pay DR providers a "market price" that incorporates the full LMP but also appropriately considers the payments that a DR provider's customers avoided making through their retail tariffs when demand was reduced. Such a rule change would appropriately encourage demand response without overly subsidizing such actions." Midwest ISO, Inc., p. 9.


  • "Under a policy of full-LMP payment for both generated energy and demand reductions, generators receive the single benefit of the full-LMP payment whereas demand response providers receive the double benefit of the full- LMP payment and bill savings. In this sense, demand resources and wholesale generators are fundamentally different, warranting different treatment in the energy markets to achieve comparable and symmetric incentives that minimize total resource costs. Failing to recognize the fundamental difference between a wholesale generator and a demand resource in the design of incentive payments for demand response would result in the inefficient utilization of society's resources under a full-LMP payment approach - i.e., higher-cost demand resources would displace lower-cost generation resources available at that time. Such a result violates the fundamental principle that a demand resource is cost-effective only when its cost is less than the avoided cost of energy (i.e., the LMP)." ISO New England Inc., p. 18-19.


  • "Analysis by ISO-NE demonstrated that, ultimately, any consumer gains from suppression of LMPs in the short-run will result in higher prices and costs in the long-run as investors adjust their resource portfolios over time in response to prices." ISO New England Inc., p. 29.


  • "[W]ise stewardship of society's resources requires that the cost effectiveness of, and associated incentive payments to, demand resources be based on a total resource cost perspective." ISO New England Inc., p. 31.


  • "In order to avoid large wealth transfers from loads that do not engage in demand response activity to loads that do provide demand response, PJM believes that appropriate and efficient demand response compensation may require coordination between the Commission, [retail regulators], competitive retail suppliers, and other RTOs, and possibly action on the part of [retail regulators] and competitive suppliers. Otherwise, if there is no coordination or supporting [retail regulator] or competitive supplier action, as necessary, the payment of the incorrect amount of economic load response compensation may significantly and unnecessarily increase the total dollar amount that PJM will need to charge PJM Market Participants, result in large cost shifts among Market Participants, and/or distort otherwise efficient incentives in the wholesale energy market." PJM Interconnection, L.L.C., p. 8-9.

Independent Market Operators And Monitors Are Troubled By FERC's 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.