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RTOs and the Public Interest

Defining the mission when the consumer plays second-fiddle to the needs of the market.

Fortnightly Magazine - September 2009

DR provider).

This retail rate offset (G) stems from the idea that the end-use customer providing the load reduction is somehow being compensated by not having to pay to receive a delivery of electricity service. Otherwise, as goes this analysis, the DR provider will end up receiving a “double payment” for reducing load—an argument seen frequently in discussions of demand-side resource theory. (See the earlier column, “ Demand-Side Dreams ,” November 2007.)

By contrast, however, the Consumer Demand Response Initiative, an informal coalition of businesses, trade associations, and non-profits represented by attorney Donald J. Sipe, argues that this “double-dipping” notion is fallacious, and that DR providers should be paid the full market-clearing price, without any offset keyed to the retail rate.

CDRI notes—correctly—that a load reduction offered by a DR provider is indistinguishable from self-generation operating behind the meter. Thus, as a self-generator should be paid the full market-clearing price for energy for its output, so too should a DR provider earn the full LMP without any retail rate offset.

As Sipe explained in the comments, the true value of demand response comes from the consumer surplus generated for all other end users, because the DR load reduction has reduced locational market-clearing prices across the board. (See, Comments of Consumer Demand Response Initiative, p. 8, FERC Docket ER09-1051, filed May 26, 2009.)

That, of course, was the point FERC commissioners Jon Wellinghoff and Suedeen Kelly were making back in 2007, when they dissented in a FERC order that killed off PJM’s economic load-response program, charging that the FERC majority had mischaracterized PJM’s DR payment as a subsidy, and had “squandered” an opportunity to develop policy on demand response and scarcity pricing. (See, Docket EL08-12, Dec. 31, 2007, 121 FERC ¶61,315.)

As Sipe argues, there’s no need for any netting out of the avoided retail cost, on the misguided theory that consumers who agree to interrupt during shortages are somehow benefitting.

“The service provided is not the mere avoidance of consumption,” he writes, “but the willingness to coordinate service interruptions with the grid operator … to balance supply and demand in a fashion that maximizes consumer surplus.”

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