[BETA] Fortnightly

Introducing dynamic, real-time, wholesale price signals to the buy side of the retail electric sector has long been the Holy Grail of electric utility restructuring. But judging by the uncertain progress achieved so far, we obviously haven’t found it yet.

Today, nearly a year and a half after the Federal Energy Regulatory Commission (FERC) issued its Order 745, the industry is discovering just how complicated and difficult implementation will be. In the order, FERC told RTO-ISO regions with organized electricity markets to pay the going wholesale power price to customers who forgo consumption and sell their negawatts back to the market. 

And the next step—“price-responsive demand,” whereby consumers simply react to price, as when they purchase other goods and services—promises no less controversy. In its recent order of first impression, approving a PRD tariff for PJM, FERC ruled against private curtailment service providers (CSP) on the two issues about which the CSPs felt most strongly (See Order issued May 14, 2012, Dkt. ER11-4628-000, PJM Interconnection, L.L.C., 139 FERC, ¶61,115) .

Figure 1 illustrates how price-responsive demand can trim monthly bills for ratepayers -- even for those who are not price-responsive! First, private demand aggregators like Viridity or EnerNOC assemble groups of customers who say they’ll buy less power if prices rise. When PJM forecasters hear that, they can then reduce the installed capacity margin needed to guarantee reliable power supplies. That allows utilities to cut back on what they must buy through PJM’s regional capacity market, which cuts capacity costs billed to all ratepayers.

Moreover, uncertainty still haunts the very existence of Order 745, which remains under appellate review at the D.C. Circuit Court of Appeals. Six weeks ago, 20 of the nation’s leading electric industry economists submitted a friend-of-the-court brief challenging FERC’s vision of paying demand response as if it were equivalent to electric generation. The amici curiae include RTO consultant Robert Borlick (whose article on this topic, “ Pricing Negawatts ,” we published in our August 2010 issue), along with Joseph Bowring (PJM’s independent market monitor), Brattle Group’s Ahmad Faruqui, Harvard’s William Hogan, CRA’s Richard Tabors, Professors James Bushnell (UC Davis), Robert Michaels (Cal State Fullerton), Shmuel Oren (Berkeley), and Richard Schmalensee (MIT), plus independent consultants Larry Ruff and Roy Shanker.

They reprise the case for “LMP – G,” as Fortnightly has examined in several articles , but they argue also that FERC’s construct is bad for the environment: they say it will encourage customers with self-generating capability to sell back their market-purchased power, while at the same time firing up dirty diesel generators behind the meter to meet their own needs. (See, Brief of Robert L. Borlick, Joseph Bowring, James Bushnell, and 18 Other Leading Economists, pp. 20-23, D.C. Cir., Case Nos. 11-1486 et al., filed June 13, 2012.) 

The Sell Side

Thirteen months ago, the RTOs first began filing tariffs to conform with Order 745 (Dkt. RM10-17, March 15, 2011, 134 FERC  ¶61,187). Yet, as of mid-July 2012, all the covered regions appeared still to be seeking final approval for their conforming tariffs.

In the Southwest Power Pool, for example—which should have provided the easiest case, as SPP operates only a location-based imbalance market, and no day-ahead market for energy as a commodity—FERC rejected the region’s proposed 745 tariff outright, as it failed to include a net-benefits test, and failed to allocate the cost of DR payments across all zones and utility service territories in which consumers would benefit