July 1, 2001
L.A. Loves a Loophole
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Demand Response: Keep It Market- Based
ITP vs. LSE, subsidies, cost recovery, regional coordination-all must be addressed to achieve FERC's goals.
The Notice of Proposed Rulemaking by the Federal Energy Regulatory Commission (FERC) to create a seamless national energy market, a "Standardized Transmission Service and Wholesale Electric Market Design," sets out a bold vision for the country. Importantly, this Standard Market Design (SMD) recognizes the value of price-responsive demand in making markets more efficient and less susceptible to the potential for market power.
EEI supports FERC in its efforts to include demand response as part of the SMD. America's electric companies-with the support and encouragement of state regulators-have created a variety of demand-response options for its customers during the past 30 years. Dynamic pricing (i.e., real-time pricing, time-of-use rates, coincident peak pricing), direct load control (i.e., air conditioner cycling), load reduction and interruption programs, and demand bidding/demand buy-back programs have all helped power companies to use their generation and other resources efficiently. They have helped to defer the need for building additional generating capacity as well.
Beyond helping to mitigate market power, demand response is critical to accurate price discovery. Demand response can also help to lower wholesale power costs, improve system reliability, and even provide new business options for ancillary services markets.
The nation's power companies-as an industry-agree on some broad goals to guide FERC in its effort to incorporate demand response into its new market framework. Overall, the federal framework should encourage demand response options that are seamless, customer-driven, and consumer-friendly.
The starting point should be to make demand response initiatives market-based. The demand-response options should not rely on subsidies or unrecoverable startup and operational costs, targets, or performance requirements. Demand-response programs that pay above-market incentives are inappropriate, even antithetical to efficient wholesale electric markets. Forcing or subsidizing demand reductions may increase demand response, but it will not make it cheaper. Higher total costs for consumers, and ultimately society, are likely.
Structure for Offering Demand Response
On the upside, FERC's structure for including demand response in its SMD establishes market incentives for rewarding demand response. For example, the structure allows for day-ahead and real-time markets for energy. It also enables multi-part bids by energy buyers and sellers. And demand response options can take advantage of locational marginal pricing and free up marketable congestion revenue rights. This should encourage participation by creating a structure that encourages customers to discover the value of demand response.
Members that are now offering demand response options-electric distribution companies, load-serving entities (LSEs), and their affiliated energy service providers-are looking for new guidelines that will create an attractive and practical market for them to continue doing so. Customers who get their power supply from an LSE under regulated retail rates should receive their demand response service from that LSE. This is fair because the LSE, with its obligation to serve, has already shouldered the risk of supply cost on behalf of its customers. The opportunity should be there for the LSE to reduce that cost in the demand response market.
The Role of the ITP