FERC’s new rule on compensation for demand resources tips the market balance toward negawatts. Arguably the commission’s economic analysis is flawed, and the rule represents a covert policy...
Two Hands Clapping
Has demand response hit an evolutionary dead end?
On March 18, the day after this issue went to press, FERC was scheduled at its decisional meeting to open a new formal inquiry on the role of demand response in regions that already have competitive wholesale power markets.
In particular, how much money should grid operators pay to electric customers who promise not to buy wholesale power?
While this new initiative presumably will cover the entire country, its purpose clearly is to settle a canard of a dispute that arose last August, when PJM proposed a new tariff for “economic” demand response— i.e., DR provided for profit, as opposed to reliability.
The case was reported in depth previously in this column, and in fact appeared ripe for decision as far back as December of last year. ( See “ Negawatt Pricing ,” December 2009. ) Yet the commission mysteriously failed to act, choosing to postpone its ruling indefinitely and prompting all manner of speculation on why the delay. Had something or someone turned the chairman’s ear?
The issue proper was whether to reward DR with a payment equal to the full wholesale market price ( e.g., the LMP, or locational market price), the theory being that when a customer promises not to buy power, it’s like selling customer-owned generation into the market. But some say a full LMP payment means double-dipping—that consumers get paid twice.
These opponents would offset any DR payment by the retail price of generation (LMP – G) because ratepayers who decline to buy already receive compensation by avoiding the purchase price and, moreover, because ratepayers who decline to buy never had title to power in the first place (so how could they be viewed as having sold it?), and because DR providers, unlike generators, won’t first have incurred fuel costs to produce that make-believe generation, and so, lacking any real cost of goods sold, the argument goes, consumers will enjoy a windfall if paid the full going market price.
The December column went on to explain that the debate attracted some heavy hitters in the world of regulatory economics, with Professor William Hogan of Harvard squaring off against Fred Kahn of Cornell, but that the weight of authority seemed to swing toward Hogan, with others arguing that LMP - G was the way to go.
Nevertheless, the real story here isn’t so much the economic theory of DR, but rather, how FERC was flummoxed by a threefold series of white papers, comments, and protests, and so fell into a decisional paralysis. These audacious arguments, presented by attorney Donald Sipe, representing the American Forest and Paper Association (AFPA) and an ad hoc group known as the Consumer Demand Response Initiative (CDRI), seemed to steer the conversation far afield of the smart-grid vision, and back toward a sort of revisionist theory—a 1930s-style of populism, where the power industry is seen as a public-purpose entity, like a government enterprise, and where the purpose of ratemaking is to