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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

at utilities and state PUCs in the installation of hourly interval and advanced metering infrastructure (AMI). California, a leader in DR technology, already has approved AMI programs for two investor-owned utilities, and has a case pending to set DR benchmarks and goals for 2008 and beyond (See CPUC Docket No. R. 07-01-041, filed Jan. 25, 2007).

In the future, such AMI investments should help utilities and state regulators to design dynamic retail electric rates that more closely mirror the pricing peaks and volatility appearing in RTO and ISO regional power markets. For example, the FERC staff study highlights legislation enacted last year in Illinois to require electric utilities to consider and evaluate dynamic retail pricing to facilitate DR from retail customers. The law directed the Illinois Commerce Commission to evaluate whether such pricing, coupled with AMI, would produce net benefits for customers (See Ill. Compiled Statutes, sec. 5/16-107[b-5].)

Overall, however, the staff report indicated AMI efforts had achieved precious little market penetration across the 50 states. That impressed FERC Commissioner Suedeen Kelly, who seized on the point this past summer in opposing the commission’s exploration of scarcity pricing.

Kelly issued a concurring and dissenting opinion on the commission’s ANOPR proposals, suggesting scarcity pricing only would offer windfalls to power producers because the industry lacks the metering technology and telemetry necessary to create retail pricing that signals short-term shortages and emergencies, or to allow consumers to respond to those signals.

“The technology and associated demand response capability must be in place before we consider raising or eliminating these price caps,” Kelly wrote.

Aggregation and Cherry-Picking

The DR business comes with a new utility industry segment known as ARCs, or “Aggregators of Retail Customers.” Examples are new companies such as Boston’s EnerNOC Inc., Oregon’s EnergyConnect Inc., and Energy Curtailment Specialists, headquartered in Buffalo, N.Y. In their ANOPR comments, these new companies provide information about their services, market shares, and typical customer profiles.

ARCs pose a policy problem, however. The act of aggregating demand curtailments of small, individual retail customers and offering the reduction to markets as a reliability or capacity resource looks very much like customer-supplied generation that displaces default standard-offer energy supplied by an LSE. It cannot easily be distinguished conceptually from a customer in a non-choice state exercising retail-supply choice. In the ARC case, the customer sells a competitive decremental curtailment, but that is little different from buying competitive incremental energy.

For this reason, FERC has proposed requiring markets to allow ARCs to aggregate retail customers, but only if no state laws or regulations bar the practice. That way, FERC does not impose its own a pro-markets policy on a state that prefers cost-of-service regulation. But it’s no assurance, according to NRECA General Counsel Wallace Tillman, in his ANOPR comments submitted on behalf of the co-op association.

As Tillman explains, the laws in most states will be silent on the question, as state laws setting up retail utility service structures were not drafted with DR and ARCs in mind.

Tillman also explains how DR aggregation threatens to push the camel’s nose into