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FERC's Full Plate

A look at issues facing the commission for the coming year.

Fortnightly Magazine - January 2012

something on this in the coming year.

Demand Response in Crisis

Nearly two years ago in this column, we asked whether demand response had hit a dead end. (Two Hands Clapping , April 2010, p. 17.) And now, in the coming year, FERC might be asked to answer exactly that question.

PJM’s pending application to institute “price-responsive demand” (see “Ten Cases to Watch,” item no. 4) challenges the notion electricity demand is inelastic.

In fact, price-responsive demand threatens to burst numerous paradigms, calling into question such basic industry constructs as “load requirement” and “resource adequacy.”

With its PRD plan, PJM would ask traditional electric distribution utilities to predict how high power prices would have to rise before their customers would cut back electric use on price alone. The utility then would guarantee to grid operators that if prices reach the target level, it will make do on less capacity, because its customers will turn their lights off. Armed with this guarantee, the RTO then can trim its load forecast and jigger the capacity market by lowering the quantity of capacity that must clear in the auction. With utilities having to buy less capacity, retail rates presumably will fall.

All this raises a problem for FERC, however: namely, how can you continue to pay customers for reducing demand if it turns out they’re perfectly happy to do it for free?

In fact, in the case before FERC, a number of parties have argued that price-responsive demand represents an “end state”—that the PRD construct should subsume and take the place of demand response in the typical RTO market design. Market players no longer would sell demand response into capacity markets as a resource that is functionally equivalent to generation. FERC’s prized Order 745, which assures that demand response gets paid the same locational marginal price (LMP) that generators get for the energy they supply, would simply become a dead letter.

In comments filed in PJM’s PRD case, Viridity warned the commission to make sure that approving PJM’s proposed tariff doesn’t mean FERC is retreating from Order 745:

“Opponents can be expected to make such an argument,” Viridity added, “simply because Order 745 provides for LMP compensation to curtailable load, while PRD does not.” (Dkt. ER11-4628, comments filed Oct. 31, 2011.)

On the other side, the Ohio PUC urged FERC to go with the flow and transition to the next level:

“PRD load,” as the PUC explained, “does not ask for payment from the RTO or require the RTO to calculate a baseline.”

“As smart grid and PRD are implemented,” the PUC continued, “electricity markets will increasingly resemble competitive markets in other sectors … where customers naturally and seamlessly respond to changing prices.

“Over time, as PRD becomes commonplace, resource adequacy increasingly should be a matter of consumer choice.”

Scrutinizing Mergers

As last year drew to a close, FERC rejected another plan to mitigate market power in the Duke/Progress merger case. The two companies had fashioned a “virtual divestiture” to shed some of the excess and over-competitive share of generation that the companies together