FERC Proposes New Compensation Structure for Demand Response Resources, Docket No. RM10-17-000

Unlike some of the current compensation structures (e.g., ISO-NE and NYISO currently pay LMP when prices are above a threshold level), FERC's proposal would apply in all markets during all hours. Also, FERC's approach would not allow a price reduction (as in PJM) for generation or transmission components of the demand responder's retail rate. Although FERC acknowledges that a "perfect solution or payment scheme may not exist," FERC nonetheless believes that its approach is correct because the payment reflects the marginal effect of each demand response resource in the hour, just as the LMP reflects the marginal effect of generation resources in each hour. As justification, FERC states that: (i) paying the LMP in all hours should allow more demand response resources to cover their investment costs and increase their ability to participate in the organized wholesale electric markets; (ii) increased levels of demand response participation should, in turn, lead to lower clearing prices in the organized wholesale energy markets; and (iii) increasing the aggregate amount of demand response resources in the organized wholesale energy markets will help to move prices closer to the levels that would result if all demand could respond to the marginal cost of energy.

While concluding preliminarily that the generic LMP pricing method should apply in all ISOs and RTOs, FERC has asked for comments on the following issues:

• The need to compensate demand response acting as a resource in organized wholesale energy markets.

• Whether current compensation for demand response providers acting as a resource in the organized wholesale energy markets is adequately procuring demand response.

• Whether there are alternative approaches to compensating demand response resources participating in organized wholesale energy markets, and the merit of those approaches in comparison to FERC's proposal.

• Whether a reduction in consumption is comparable to an increase in electricity production for purposes of balancing supply and demand, and whether, therefore, demand response providers and generators should receive comparable compensation.

• Whether paying LMP to demand response resources is comparable compensation or is more or less than comparable to compensation paid to generation in the ISO and RTO energy markets.

• Whether payment of LMP should apply to all hours, and, if not, the criteria that should be used for establishing the hours when LMP should apply.

• Whether requiring payment of LMP is appropriate across all ISOs and RTOs, or whether variations among ISOs and RTOs justify varying levels of demand response resource compensation.

• Whether the Commission should allow regional variations for an ISO or RTO that does not seek to compensate demand response resources participating in the organized wholesale energy market.

• Whether, and under what circumstances, the Commission should conduct periodic reviews of demand response compensation and the criteria that should be used in making such assessments.

** In Order No. 719-A, FERC emphasized its broad authority under the Federal Power Act, including jurisdiction to make rules concerning demand response essentially because demand response "affects" public utility wholesale rates. See Order No. 719-A at P 42-54.

Other Issues for Market Participants to Consider (some of which were raised by Commissioner Moeller's dissent) include:

• Is a "one-size fits all" approach needed and appropriate?

• Does this rulemaking represent an unnecessary departure from FERC's historic willingness to recognize regional differences and stakeholder-achieved RTO/ISO pricing methodologies? Is this effort to require a standardized market approach to demand response pricing a precursor of standard market design in other critical areas?

• Is it appropriate to dictate a standard market approach to demand response in RTOs and ISOs to the exclusion of non-RTO/ISO portions of the country?

• Are there particular regional differences that should be considered, such as the success to date in facilitating demand response, the degree of unachieved demand response penetration, state practices affecting demand response and pricing?

• What does FERC's proposal say about the ISO/RTO stakeholder process, such as in PJM where PJM's Board recently approved a compensation structure for demand response? Is FERC correct to terminate the pending proceeding on the PJM proposed compensation structure?

• Could FERC's proposed compensation structure have unintended adverse effects on demand response participation or the efficient operation of the organized markets?

• Does the NOPR lack the evidence to support FERC's proposal, as suggested by Commissioner Moeller?

• Could the NOPR discourage emerging markets from continuing to evolve toward the LMP model?

• Will the NOPR discourage some non-organized regions from moving toward a market structure?

• Will residential ratepayers subsidize other classes of service while unable to participate themselves in demand response programs?

• Is demand response better dealt with at the retail level?

Comment Due Date:  May 13, 2010

Please click here to access the Notice of Proposed Rulemaking.

Please click here to access the Commission's press release.