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Demand Response: Breaking Out of the Bubble

Using demand response to mitigate rate shocks.

Fortnightly Magazine - March 2007

for electricity, where the more you use, the more you pay per kilowatt-hour. (Some will remember that not-so-long-ago, the inverse was true, and customers faced declining block rates—a practice designed to encourage more consumption of product, and common to many industries.) Even if they are cost-based, reflecting the rising marginal cost of electricity, they do make some consumers better off at the expense of others. And sometimes similar tradeoffs between winners and losers have been made even when they are not cost based.

The state of California, in the aftermath of the energy crisis, concluded that rates had to go up by roughly 20 percent to make the state whole in its role as the supplier of last resort. But this increase was not applied uniformly across the board.

There are encouraging signs that utilities and states are moving to offer dynamic pricing on an elective basis, with Southern California Edison being the latest large utility to make such a commitment. 13 However, such elective offerings by a handful of utilities are unlikely to prevent the recurrence of a power crisis in the years to come, since only a small number of customers are likely to enroll in such programs. During an electricity crisis, the usual remedies of curtailing and interrupting large customers and making voluntary appeals for conservation to small commercial and residential customers are likely to be the only means of defense against blackouts and brownouts.

While reserve margins are still in the 20 percent-plus range, it is time to rethink the anti-DR bias inherent in default service. Regulators and utilities seriously should rethink their current policies and consider offering some type of dynamic pricing as the default rate for all customers and allowing customers to “opt out” of static, non-time varying rates if they so choose. The specific type of dynamic-pricing rate can vary by customer class. For example, critical-peak pricing might be best suited to residential and small commercial and industrial customers, while real-time pricing might be best suited for larger commercial and industrial customers.

Will that lead to a ratepayer revolt? No. These very same customers have learned to live with adjustable rate mortgages where the risks and corresponding benefits are much higher than those associated with monthly electricity purchases.



1. U.S. Department of Energy, Benefits of Demand Response in Electricity Markets and Recommendations for Achieving Them, A Report to the United States Congress Pursuant to Section 1252 of the Energy Policy Act of 2005 and Federal Energy Regulatory Commission, Assessment of Demand Response & Advanced Metering, Staff Report, Docket Number AD-06-2-000, August 2006.

2. California Public Utilities Commission, “Order Instituting Rulemaking on Policies and Practices for Advanced Metering, Demand Response, and Dynamic Pricing,” Ruling 02-06-001, filed June 6, 2002, San Francisco, Calif.

3. FERC Staff Report, Assessment of Demand Response & Advanced Metering, Docket Number AD-06-2-000, August 2006. Figure IV-2.

4. Ahmad Faruqui and Stephen S. George, “Quantifying Customer Response to Dynamic Pricing,” The Electricity Journal, May 2005.

5. To date, generation planning has considered the costs of alternative power plants and the mix