Using demand response to mitigate rate shocks.
Ahmad Faruqui is a principal with The Brattle Group, located in the firm’s San Francisco office. This paper was inspired by conversations with Roger Levy and has benefited from comments on a draft version by Bob Borlick, Phil Hanser, Bob Lieberman, Johannes Pfeifenberger, and Lisa Wood. Contact Faruqui at firstname.lastname@example.org. Ryan Hledik provided background research for this article.
By protecting customers from price spikes during a few hours in the year, existing rate-design regulations also are preventing them from lowering their average rates throughout the entire year. That is the paradox of utility regulation.
Responding to the directives of the Energy Policy Act of 2005 (EPACT), two recent reports by the U.S. Department of Energy and the Federal Energy Regulatory Commission (FERC) make a strong case for dynamic pricing of electricity.1 These reports pick up on a theme that was first articulated by the California Public Utilities Commission (CPUC) in 2002. As it began its deliberations on dynamic pricing, advanced metering, and demand response (DR), the CPUC instituted Rulemaking (R.) 02-06-001 “to provide the forum to formulate comprehensive policies that will develop demand flexibility as a resource to enhance electric system reliability, reduce power purchase and individual consumer costs, and protect the environment.”2