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One if by Wholesale, Two if by Retail

Which path leads to the smart grid?

Fortnightly Magazine - October 2010

own retail settlements process with a comprehensive mathematical algorithm that Sipe said would solve the missing money problem. He was called on during the conference to explain his model, though it appeared that few actually understood how it would work. In fact, the written explanation extends some 38 pages. (See “Integration of Demand Response into Day-Ahead Markets: A Supply Side Approach,” filed May 13, 2010 as attachment B to CDRI’s comments in FERC Docket RM10-17.)

California settles the problem at the retail, state-regulated level, through a program known as proxy demand resource, which won conditional approval from FERC this past summer. (See, Docket ER10-765, July 15, 2010, 132 FERC ¶61,045.)

The California solution requires any state-certified ARC (aggregator of retail customers) first to agree in advance to refund the missing money to the LSE, to gain authority to offer DR into the California ISO wholesale market. In effect, this equates DR compensation to LMP - G, rather than full LMP.

But this California model works only because the California ISO operates primarily in a single state. A state-level settlement process could prove contentious in a multi-state RTO, such as PJM or MISO, if some state PUCs deny certification to ARCs, as has occurred in Minnesota and Indiana. (See, Minn. PUC No. E-999/CI-09-1449, May 18, 2010; Ind. URC Cause No. 43566, July 28, 2010.)

As in those cases, the states that deny certification for ARCs would find their native ratepayers footing the bill ( i.e., the RTO market uplift) to pay the cost of rewarding ARCs operating in other states with full LMP compensation. States also could disagree over the amount of DR that ratepayers should fund—a point brought home in colorful fashion by Megan Wisersky, electric planning manager for Madison Gas & Electric:

“A thought just crossed my mind… Our retail customers are already paying for utility demand response… it’s predicated on the goals of the state of Wisconsin.

“All of a sudden I got this real sick feeling in my stomach that … now my customers are going to have to pay for any other retail demand response policy of who knows how many other states … [with] different goals, different policies, different regulatory regimes.”

End of Story?

The disagreement between Wellinghoff and Moeller, on whether to focus on wholesale or retail markets in promoting DR and building the smart grid, could well prove most significant in terms of its effect on load forecasting and operational requirements for capacity and operating reserves.

The reason is simple. When ratepayers display price elasticity, consuming less power when prices rise, the need for load and capacity become similarly elastic.

Ohio’s Paul Centolella and PJM’s Andy Ott said as much in their 2009 white paper on price-responsive demand, where they noted that static load forecasts are inefficient if they take no account of ratepayer reaction to high prices:

“Such forecasts would continue to produce resource and planning reserve requirements, which would force LSEs with price-responsive demand to carry resources and reserves for demand that would not be present at higher spot prices.” (See, Centolella