On March 18, 2010, FERC issued a Notice of Proposed Rulemaking (“NOPR”) proposing to improve competiveness in organized wholesale energy markets by compensating demand response resources (“DRRs”) based upon the Locational Marginal Price (“LMP”) in the appropriate Regional Transmission Organization (“RTO”) or Independent System Operator (“ISO”).

To FERC, DRRs are an important component of their goal of promoting system reliability and competitiveness in wholesale markets.  FERC’s Order No. 719 addressed the need to improve competitiveness of the organized energy markets and to encourage new technology development.  FERC is particularly focused in the above-mentioned NOPR on the ability of DRRs to directly bid into the market and lower demand, and thus lower clearing prices.  DRRs can also take the pressure off of more expensive generation or eliminate the need to create new generation.  FERC also argues that DRRs can apply downward pressure to generators and affect their market power, as they risk bidding too high and being excluded from dispatch.

FERC currently allows a system-by-system approach where each RTO and ISO can compensate DRRs in their own energy market.  Some DRRs are paid the LMP with retail costs subtracted, while others receive the LMP only when prices reach a certain level.  FERC’s NOPR states that after several years of monitoring DRRs participation in ISO and RTO markets, FERC is concerned that compensation has negatively affected the development and use of DRRs.  FERC proposes to add section 35.18(g)(1)(v) to their regulations to establish a specific compensation approach for DRRs in organized wholesale energy markets.  Under this proposed section, ISOs and RTOs that have DRRs provisions in their tariff must pay for DRRs, in all hours, the market price for energy (LMP), for demand reductions made in response to price signals.

In their NOPR, FERC seeks comments within 45 days of publication in the Federal Register on the following issues:

  • 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 the LMP for DRRs is more or less comparable to compensation paid for generation in the ISO and RTO markets;
  • Whether payment of the LMP should apply to all hours, and if not, the criteria that should be used for establishing the hours when the LMP should apply; and
  • Whether requiring payment of the LMP is appropriate across all ISOs and RTOs or whether variations justify varying levels of compensation.

Notably, Commissioner Philip Moeller released a separate opinion, concurring in part and dissent in part with the NOPR.  Commissioner Moeller noted the importance of DRRs and agreed that the benefits of DRRs are proven and significant.  However, Commissioner Moeller stated that moving too quickly to reach a desired result could end in unintended consequences.  Furthermore, Commissioner Moeller feared that the current one-size-fits all approach under the NOPR could result in uneconomic outcomes that would stunt DRR growth and development.  As such, Commissioner Moeller stated that a preliminary issuance, such as a Notice of Inquiry, would have provided FERC valuable evidence and data before initiating a formal rulemaking proceeding through the NOPR. 

FERC’s full NOPR is available at www.ferc.gov under Docket No. RM10-17-000.