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Will States Take Over Demand Response Markets in the US?

How will demand response (DR) be compensated in wholesale energy markets under NY’s Reforming the Energy Vision (REV) initiative in the wake of the DC Circuit Court’s decision vacating Order 745, and how will the bulk system respond to cuts in peak demand with the growth of distributed energy generation (DEG)? How will FERC’s role change as regulation of DR migrates from federal to state jurisdiction? This article focuses on DR, and a follow up will be coming shortly on DEG in our ongoing series on REV.

Since DR in wholesale energy markets under Order 745 was struck down by the DC Circuit, we have seen an industry push to move DR from federal to state control. But is this push also supported by politicians and regulatory agencies?

On the one hand, on November 19, the New England Power Generators Association (NEPGA) filed a complaint similar to First Energy’s regarding PJM’s DR programs. NEPGA requests that DR be removed from ISO-NE’s 9th Forward Capacity Auction. Like FirstEnergy, NEPGA reasoned that the DC Circuit’s ruling on Order 745 regarding DR in energy markets should apply to all wholesale markets.

On the other hand, on November 20, New Mexico Senator Martin Heinrich introduced a bill that would amend the Federal Power Act (“FPA”) by explicitly giving FERC jurisdiction over DR in wholesale energy, capacity, and ancillary service markets. Heinrich stated that the FPA was drafted before RTO/ISOs and when “there were few interstate sales of electricity.” Heinrich added, “there is some question whether Congress intended a reduction in power use to be considered on equal footing with the generation of power, even though both clearly affect the rates consumers pay for power.” However, doubt exists as to whether the bill will pass given Congress’ less than impressive track record on passing energy efficiency legislation.

On November 3, Feller Energy Law Group attended a panel at NYU Law School regarding, “Possible Impacts of the New York Public Service Commission’s ‘Reforming the Energy Vision’ on Wholesale Power Markets.” The panel was moderated by David Schwartz, Partner, Latham & Watkins, who opened the discussion with the following statement: “When it comes to the way that REV intersects with the bulk power markets, there is no guidance yet, we are without any descriptive effort by anyone to tell us how this world will work.” He went on to ask, with each [Distributed System Platform (“DSP”)] essentially functioning as a mini wholesale market, “how will this intersect with the existing FERC regulatory paradigm?” Furthermore, and more specifically, how will the DC Circuit’s vacating of Order 745 impact REV’s ultimate treatment of DR?

REV’s Impact On The DR Market Hinges On REV’s Success

As a threshold issue, there was consensus among the panelists that the impact of REV on the wholesale market, or any market, depends on how successful it is. John P. Reese, Senior Vice President, U.S. Power Generating Company in his opening remarks noted that REV will be driven by technology and that the adoption of more DR will not be guaranteed by REV. He stated, “If you look at demand response in ConEd’s service territory, in the last 5 years there’s been a 40% reduction in people providing demand response.” Even with rising capacity prices and ConEd tariffs raising the available payments for demand response participants, Reese noted that DR providers are not willing or able to meet the reliability requirements and to take on the responsibility of remaining on call to cut back their energy usage. Some of the fundamental DR market penetration issues will ultimately need to be resolved for REV to have a meaningful impact.

Richard B. Miller, Director, Energy Markets Policy Group at Con Edison opined that REV will be a slow process, driven by technology more than anything else. Miller noted, “the regulatory construct does not matter. Technology matters and technology will determine the degree to which things actually change. The important thing is to have a regulatory construct in place to anticipate those technology changes.”

To What Extent Will New Markets Under REV Interact With Wholesale Markets?

According to Miller, wholesale issues have not been a focus of REV thus far, however, they do need to be resolved as early as possible. As it currently functions, ConEd’s DR programs are not wholesale or FERC jurisdictional. Miller went on to state that the current DR construct is as follows: ConEd pays customers directly for DR, and then “recovers the cost themselves through their own PSC level tariff. It does not require any interaction with the NYISO. It affects [emphasis added] how the NYISO operates the system, but it does not require any direct interaction with the NYISO.” The core issue arising from this sentence is that Section 205 of the FPA gives FERC jurisdiction over “all rules and regulations affecting” wholesale electric rates. This word, “affecting,” has been the central issue of the ongoing DR litigation.

Nevertheless, Miller continued, if and when ConEdison’s relationship with NYISO “changes to a buy and sell relationship to the NYISO” there will be a jurisdictional issue. Further, by expanding a competitive DR market under the control of a Distributed System Platform Provider (“DSPP”), Miller noted that the programs could still remain under the jurisdiction of the PSC by maintaining the basic current DR construct. Ultimately, the only impact according to Miller is that forecasted load would be reduced, which would not entail selling anything to the NYSIO.

Aftermath of 745, Utilities picking up the Slack

To the extent that DR is a vital part of maintaining system reliability in wholesale markets, there was an overall question of where the missing DR would now come from if Order 745 is to remain vacated. (See here for a fuller description of the Order 745 dispute, which may eventually be resolved at the Supreme Court.) Miller framed the issue by noting that ConEd already has DR programs that are meant to ensure distribution system reliability, whereas NYISO’s responsibility is bulk system reliability. Essentially, if RTOs cannot pay customers directly for DR, then ConEd will “to some extent, be responsible for maintaining bulk system reliability.” This notion is similar to PJM’s recent informational report (.pdf) on proposed ways to keep DR in its markets.

If Order 745 is ultimately entirely vacated by the Supreme Court, then we will likely see REV move much faster on DR in order to make up for the part of the market that relies on federally regulated DR.  Reese supported this notion, stating that ConEd’s DR program will have to change if it is going to have to pick up all the DR responsibilities with the end of Order 745, especially considering the 40% drop in DR participation over the last five years. Either DR providers will need to get paid more, or DR technology will have to evolve so that customers will not feel like providing DR is such a burden, Reese suggested.

This blog was co-written with Natara Feller.

Lead image: U.S. map via Shutterstock

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