Changes in regulatory requirements, market structures, and operational technologies have introduced complexities that traditional ratemaking approaches can’t address. Poorly designed rates lead to...
Demand Response: Breaking Out of the Bubble
Using demand response to mitigate rate shocks.
year, Gordon van Welie, president and CEO of the New England ISO, spoke at the ISO’s Annual Demand Response Summit about the need for states to implement innovative retail-rate designs that encourage price-responsive demand by letting prices rise during peak periods, especially on critical supply shortage days. He said only then can customers make informed decisions about electricity use. Positing that states face a choice between continuing to incur the high costs of overbuilding the system that reinforces consumption on the few highest demand days or, instead, becoming more efficient and getting more from the existing infrastructure, he called for making dynamic pricing the basis for default pricing for large customers. 8
The atmosphere for dynamic pricing was similar at the national town meeting and symposium on DR that was held in Berkeley in June 2006. 9 Jackie Pfannenstiel, the chair of the California Energy Commission, noted that when she was just beginning her career in Connecticut, a time-of-use pricing experiment was conducted in that state showing that customers did respond to time-varying rates and that they would accept them as a means of lowering their bills and improving system reliability. But even though 30 years had come and gone, and numerous other experiments had been conducted across the country, decision makers in key positions at utilities and commissions across the nation continue to be skeptical.
Four summers ago, just months after the California energy crisis ended, the time seemed right for DR. Specifically, one analyst noted: 10
“There is a timely and renewed national interest in price-responsive demand among utilities, independent system operators, policy-makers, and regulators. The Federal Energy Regulatory Commission and Department of Energy co-sponsored a conference on demand response in February. Independent system operators in California, New York, and New England initiated widely publicized price-responsive retail-load programs last summer that are still in place. And individual utilities have recently introduced a variety of price-responsive demand programs.”
That year, then FERC Chairman Pat Wood had touted price-responsive demand as a way to potentially increase the effectiveness of wholesale markets. In FERC’s standard market design white paper issued in March 2002, DR was cited as an important design requirement.
But outside of the developments in California, and a few pilots in other states, little progress on dynamic pricing has taken place. One way to break the logjam is to make dynamic pricing part of the conditions of basic electricity service. Last summer’s heat wave is yet another reminder that we still have not progressed very far in terms of sending dynamic-price signals to customers. Demand was kept in check and blackouts remained localized by cutting supplies to customers on curtailable and interruptible rates and through voluntary appeals for conservation. Absent such emergency efforts, electricity could have gone out for large portions of the country.
The Blocking Action
The inability of the state regulatory process to include dynamic pricing as part of the standard electric-rate offering to retail customers in non-restructured states, and as part of the default service in restructured states, demands some attention. This reluctance seems to be coming from