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ITP vs. LSE, subsidies, cost recovery, regional coordination-all must be addressed to achieve FERC's goals.
Fortnightly Magazine - October 15 2002

Under FERC's proposed Standard Market Design, independent transmission providers (ITPs) will be created with specific wholesale market mandates. The ITP must promote economic efficiency, maintain power system reliability, guard against market power, and increase choices for wholesale market participants. The ITP must also assure that demand response is incorporated fully and efficiently into its wholesale markets. Given these responsibilities, the ITPs should establish and enforce bidding and trading rules, and not compete with LSEs to provide the customer with demand-response options.

Although it may make sense for ITPs to create demand reduction programs in response to system emergencies, the function of offering demand-response programs is best left to those that have business relationships with customers, including the electric distribution companies, the LSEs, their affiliated energy service providers, and others. There are practical considerations as well, given that the demand response provider will have to account for thousands of retail customers, and perhaps several different retail tariffs and contracts.

Further, the ITP is also invested with the authority to monitor markets-including demand response markets-and to mitigate market power. If the market referee is competing with the players for customers, it will lead to a confusing and even counterproductive situation that will impede program innovation and new entrants to the market.

ITP governance may also create additional barriers to electric transmission and supply investment. In the proposed SMD, demand response is positioned equally with generation and transmission as an option for meeting reserve adequacy needs. There are calls for strong participation by public interest groups and alternative energy providers. Since demand response does not raise any siting concerns, as a power plant or transmission line does, it will be seen as a popular option, especially with those who oppose building electric facilities.

Energy efficiency and demand response have had, and will continue to play, an important role in meeting energy requirements. But they should not be used to discourage, or purposely delay, needed investment in generating and transmission facilities.

The proposed SMD's effort to incorporate demand response also raises jurisdictional issues with the states. There is possible conflict between a state's integrated resource planning and the regional resource requirements that are created by the ITPs. Many states have active and creative approaches, which may be in conflict with ITP requirements.

Other jurisdictional issues include:

  • What if a state- or ITP-mandated demand response program doesn't work?
  • Will states allow "fail to perform" risk to be transferred to demand response customers?
  • How will costs be recovered if the ITP decides to establish some subsidy for demand response that raises costs for a state jurisdictional LSE?
  • Finally, will the framework encourage retail "dynamic pricing?" This may be at odds with the goal of some states to shield their customers from price volatility.

Federal and state jurisdictional overlap exposes uncertainty over recovering program costs and infrastructure development. Such uncertainty can have direct economic consequences, as well as discourage new investment in demand response. These overlaps need to be worked out on a regional basis.

EEI and its member companies do believe that demand response in FERC's proposed Standard