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Demand-Side Dreams

FERC would relax price caps—sending rates skyward—to encourage customers to curtail loads.

Fortnightly Magazine - November 2007

without undoing or upsetting the significant efforts that have already been made in providing demonstrable benefits to wholesale customers.”

The Market Doubters

This latest FERC initiative is an Advance Notice of Proposed Rulemaking (ANOPR). Rather than propose concrete rules, FERC floated some ideas to solicit industry comments or alternative recommendations aimed at achieving the same basic objectives.

For example, FERC has offered four different alternatives for scarcity pricing to boost demand response, including Option 2, which would allow demand bids by energy buyers to set the market price.

Led by the American Public Power Association, many constituencies oppose scarcity pricing. They contest the notion RTO markets have produced benefits and require only a modest tweaking. Not only that, APPA called for a formal investigation of RTOs and their market structures.

Others have questioned the purpose or mission of RTOs. Back in May, Sens. Joe Lieberman and Susan Collins, the chairman and ranking minority member of the Senate Committee on Homeland Security and Governmental Affairs, asked the U.S. Government Accountability Office (GAO) to study RTO mission statements, planning processes, startup and operating costs, annual operating budgets, and cost-benefits analysis of existing and proposed policies. The GAO answered that it would start work around the first of September.

Other industry players also have questioned whether RTO markets are so successful as to require only incremental improvements.

For example, in a telling observation, the Blue Ridge Power Agency (a municipal anti-market traditionalist whose members nevertheless all operate within the PJM footprint), notes that traditional, long-term, cost-based power requirements contracts are becoming difficult to find:

“The clearing prices set in PJM’s spot markets are affecting the prices and terms sellers in the bilateral market offer for longer-term power supplies.” In other words, suppliers increasingly are indexing their deals to established pricing benchmarks in the RTO’s regional spot market. One would think, however, that such indexing would indicate well-functioning markets with reliable pricing.

The National Rural Electric Cooperative Association (NRECA), among others, has joined APPA in opposing the notion that prices must climb skyward so that retail customers will “feel enough pain to provide enough demand response to mitigate prices.”

Nevertheless, there appears to be at least some industry support for FERC’s scarcity-pricing idea. As the Electric Power Supply Association (EPSA) states, “Until price caps are lifted, demand response participation will be inadequate.” EPSA’s comments, as with most from the utility industry, were filed at FERC in mid-September.

Just six weeks ago, the Midwest Independent System Operator (MISO) proposed what could well be the first tariff in the United States that seeks to price an electric utility service in terms of what the customers will pay to avoid a system failure. In this case, the scarcity price could rise as high as$3,500/MWh.

MISO proposes a sloping demand-curve mechanism to calculate a market-clearing price for operating reserves above the market-wide offer cap for sellers of energy. By no mere coincidence, the MISO proposal mirrors the third of the four alternative options FERC has vetted in the ANOPR for introducing scarcity pricing to boost demand response.

In MISO, the