One of the worst orders FERC has ever produced
Robert Borlick is an energy consultant with more than forty years of experience related to the electric power industry. He previously held partner-level positions in two international consulting firms: Putnam, Hayes & Bartlett, Inc., and Hagler, Bailly, Inc. Mr. Borlick actively participated in the FERC docket that produced Order 745 and an amicus curiae opposing Order 745 before the Supreme Court.
While reading Charles Cicchetti's recent article extolling the virtues of FERC Order 7451, I had the feeling that he and I live in different universes. For reasons presented below, I view Order 745 as one of the worst orders FERC has ever produced.
Order 745 is Seriously Flawed
Order 745 is flawed in four ways. The rule: overcompensates demand response, unduly discriminates against wholesale suppliers, sanctions and institutionally enforces the exercise of monopsony market power, and will ultimately raise electricity prices.
So what's not to not like?
Order 745 Overcompensates Demand Response
FERC's basis for paying demand response, DR, with full locational marginal pricing, LMP, is that DR provides a balancing service that is equivalent to generation. But they are not equivalents. The balancing service provided by DR causes the independent system operator to lose sales revenues, whereas, the balancing service provided by generators does not.
Thus, Order 745 forces a system operator to incur a cost of two times LMP for a megawatt-hour of DR-sourced balancing service. Once through a direct payment of LMP and again through a revenue loss of LMP, compared to just LMP when it procures a megawatt-hour of generator-sourced balancing service. The FERC lawyers, but not its economists, conveniently ignored this fact.