On July 16, 2009, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued Order No. 719-A affirming its decision in Order No. 719 that removing barriers to demand response is consistent with FERC’s duty to ensure the sound operation of organized wholesale electric markets. However, FERC exempted small utilities that distributed up to 4 million megawatt-hours (“MWh”) during the previous year.

The Commission issued Order No. 719 on October 17, 2008, to improve the operation of organized wholesale electric markets in four areas: (1) demand response, including pricing during periods of operating reserve shortage; (2) long-term power contracting; (3) market-monitoring policies; and (4) the responsiveness of Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”) to their customers and other stakeholders.

Order No. 719 required grid operators to accept bids from demand resources and to waive charges to energy buyers for voluntarily reducing demand during an emergency. It also required RTOs and ISOs to amend their market rules as necessary to permit an aggregator of retail customers to bid demand response on behalf of retail customers directly into the RTO’s or ISO’s organized markets, unless the laws or regulations of the relevant electric retail regulatory authority do not permit a retail customer to participate.

In Order No. 719-A, the Commission modified the rule to prohibit market operators from accepting bids that include aggregated demand response provided by customers of small utilities that distributed up to 4 million MWh during the previous year, unless a small utility’s retail regulator authorizes such aggregation. RTOs and ISOs may continue to accept bids from companies that aggregate demand response provided by customers of larger utilities, unless the relevant retail regulator prohibits those customers from participating in wholesale markets.

The Commission reiterated that existing RTO and ISO market rules that do not allow for prices to rise sufficiently during an operating reserve shortage to allow supply to meet demand may be unduly discriminatory. Therefore, the Commission reaffirmed its decision to require RTOs and ISOs to reform their market rules so that prices during operating reserve shortages more accurately reflect the value of energy during such shortages. The Commission stated that this shortage pricing rule is intended to correct this issue while providing protection against the exercise of market power.

Order No 719-A also expands and clarifies the role of market monitors. The modified rule allows an independent market monitor to oversee both the RTO or ISO as well as market participants operating in the same RTO or ISO for activity in that RTO or ISO. To alleviate concerns over potential conflicts of interest, the Commission will permit an RTO or ISO market monitor to enter into contracts to monitor a market participant operating in the same RTO or ISO for activity in that RTO or ISO, under the following conditions: (1) the relationship between the entity and the market monitor and the market monitor’s scope of work for the entity are both mandated by the Commission in an order on the merits, (2) the contract is filed with the Commission for approval, and (3) the contract contains a provision that the entity must obtain permission from the Commission to terminate the employment of the market monitor.

The Commission’s order is available at: http://www.ferc.gov/whats-new/comm-meet/2009/071609/E-1.pdf.