
[Federal Register: March 29, 2010 (Volume 75, Number 59)]
[Proposed Rules]               
[Page 15362-15371]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr10-15]                         

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM10-17-000]

 
Demand Response Compensation in Organized Wholesale Energy 
Markets

March 18, 2010.
AGENCY: Federal Energy Regulatory Commission, Energy.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Federal Energy Regulatory Commission is issuing a Notice 
of Proposed Rulemaking (NOPR) proposing an approach for compensating 
demand response resources in order to improve the competitiveness of 
organized wholesale energy markets and thus ensure just and reasonable 
wholesale rates. The Commission invites all interested persons to 
submit comments in response to the regulatory text proposed herein.

DATES: Comments are due May 13, 2010.

ADDRESSES: You may submit comments, identified by docket number by any 
of the following methods:

[[Page 15363]]

     Agency Web Site: http://ferc.gov. Documents created 
electronically using word processing software should be filed in native 
applications or print-to-PDF format and not in a scanned format.
     Mail/Hand Delivery: Commenters unable to file comments 
electronically must mail or hand deliver an original and 14 copies of 
their comments to: Federal Energy Regulatory Commission, Secretary of 
the Commission, 888 First Street, NE., Washington, DC 20426.
    Instructions: For detailed instructions on submitting comments and 
additional information on the rulemaking process, see the Comment 
Procedures Section of this document.

FOR FURTHER INFORMATION CONTACT: 
Arnie Quinn, Federal Energy Regulatory Commission, Office of Energy 
Policy & Innovation, 888 First Street, NE., Washington, DC 20426. (202) 
502-8693. arnie.quinn@ferc.gov.
Helen Dyson, Federal Energy Regulatory Commission, Office of the 
General Counsel, 888 First Street, NE., Washington, DC 20426. (202) 
502-8856. helen.dyson@ferc.gov.

SUPPLEMENTARY INFORMATION: 

130 FERC ] 61,213, PJM Interconnection, LLC, Docket No. EL09-68-000

Notice of Proposed Rulemaking

Table of Contents


                                                               Paragraph
                                                                Numbers

I. Background...............................................           2
    A. Role of Demand Response in Organized Wholesale Energy           2
     Markets................................................
    B. Current ISO and RTO Demand Response Programs.........           7
    C. The Need for Reform..................................           9
II. Discussion..............................................          11
III. Information Collection Statement.......................          24
IV. Environmental Analysis..................................          32
V. Regulatory Flexibility Act Certification.................          33
VI. Comment Procedures......................................          41
VII. Document Availability..................................          45


    1. The Federal Energy Regulatory Commission (Commission) is 
proposing to revise its regulations to establish the approach described 
below as compensation for demand response \1\ resources \2\ 
participating in organized energy markets. We propose that Independent 
System Operators (ISOs) and Regional Transmission Organizations (RTOs) 
\3\ with tariff provisions permitting demand response providers to 
participate as resources in energy markets by reducing consumption of 
electricity from their expected levels in response to price signals be 
required to pay to demand response providers, in all hours, the market 
price for energy for such reductions.\4\
---------------------------------------------------------------------------

    \1\ Demand response means a reduction in the consumption of 
electric energy by customers from their expected consumption in 
response to an increase in the price of electric energy or to 
incentive payments designed to induce lower consumption of electric 
energy. 18 CFR 35.28(b)(4).
    \2\ Demand response resource means a resource capable of 
providing demand response. 18 CFR 35.28(b)(5).
    \3\ The following RTOs and ISOs have organized wholesale 
electricity markets: PJM Interconnection, LLC (PJM); New York 
Independent System Operator, Inc. (NYISO); Midwest Independent 
Transmission System Operator, Inc. (Midwest ISO); ISO New England, 
Inc. (ISO-NE); California Independent System Operator Corp. (CAISO); 
and Southwest Power Pool, Inc. (SPP).
    \4\ This provision applies only to demand response acting as a 
resource in organized wholesale energy markets. The provision will 
not apply to demand response under programs that ISOs and RTOs 
administer for reliability or emergency conditions, such as, for 
instance, Midwest ISO's Emergency Demand Response; NYISO's Emergency 
Demand Response Program; PJM's Emergency Load Response; and ISO-NE's 
Real-Time 30-Minute Demand Response Program, Real-Time and 2-Hour 
Demand Response Program, and Real-Time Profiled Response Program. 
This provision also will not apply to compensation in ancillary 
services markets, which the Commission has addressed elsewhere. See 
e.g., Wholesale Competition in Regions with Organized Electric 
Markets, Order No. 719, 73 FR 64,100 (Oct. 28, 2008), FERC Stats. & 
Regs. P 31,281 (2008) (Order No. 719 or Final Rule).
---------------------------------------------------------------------------

I. Background

A. Role of Demand Response in Organized Wholesale Energy Markets

    2. The Commission has acted over the last several decades to 
implement Congressional policy to expand the wholesale energy markets 
to facilitate entry of new resources and support competitive markets. 
Most recently, the Commission in Order No. 719 implemented a series of 
reforms aimed at improving the competitiveness of the organized energy 
markets, finding that effective wholesale competition protects 
consumers by, among other things, providing more supply options, 
encouraging new entry and innovation, and spurring deployment of new 
technologies.\5\ Improving the competitiveness of organized wholesale 
markets, the Commission concluded, is therefore ``integral to the 
Commission fulfilling its statutory mandate to ensure supplies of 
electric energy at just, reasonable, and not unduly discriminatory or 
preferential rates.'' \6\
---------------------------------------------------------------------------

    \5\ See Order No. 719 at P 1; see also Regional Transmission 
Organizations, Order No. 2000, FERC Stats. & Regs. ] 31,089, at P 1 
(1999), order on reh'g, Order No. 2000-A, FERC Stats. & Regs. ] 
31,092 (2000), aff'd sub nom. Pub. Util. Dist. No. 1 of Snohomish 
County, Washington v. FERC, 272 F.3d 607, 348 U.S. App. D.C. 205 (DC 
Cir. 2001).
    \6\ Order No. 719 at P 1.
---------------------------------------------------------------------------

    3. As the Commission recognized in Order No. 719, active 
participation by customers in organized wholesale energy markets 
through demand reductions helps to increase competition in those 
markets.\7\ Demand reductions whereby customers reduce electricity 
consumption from normal usage levels in response to price signals can 
generally occur in two ways: (1) Customers reduce demand by responding 
to dynamic rates that are based on wholesale prices (sometimes called 
``price-responsive demand''); and (2) customers can provide demand 
response that acts as a resource in wholesale markets to balance supply 
and demand. While a number of States and utilities are pursuing retail-
level price-responsive demand initiatives based on dynamic and time-
differentiated retail prices and utility investments, these are State 
initiatives, and, thus, are not the subject of this proceeding.\8\ Our 
focus here is on customers providing--through bids--demand response 
that acts as a resource in organized wholesale energy markets.
---------------------------------------------------------------------------

    \7\ See Order No. 719 at P 48.
    \8\ Some ISOs and RTOs are engaged in stakeholder discussions 
concerning the coordination necessary between wholesale markets and 
retail rate design, and we expect to address any filings emerging 
from those discussions in future proceedings.
---------------------------------------------------------------------------

    4. Demand response acting as a resource in organized wholesale 
energy markets helps to improve the functioning and competitiveness of 
such markets in several ways. First, demand response can lower prices. 
When bid directly into the wholesale market, demand response--which 
results in

[[Page 15364]]

lower demand--can result in lower clearing prices.\9\ For example, a 
study conducted by PJM, which simulated the effect of demand response 
on prices, demonstrated that a modest three percent load reduction in 
the 100 highest peak hours corresponds to a price decline of six to 12 
percent.\10\ Demand response can also lower prices in the organized 
wholesale energy markets by reducing the need to dispatch higher-priced 
generation, or construct new generation, in an effort to satisfy 
load.\11\ Second, demand response can mitigate generator market 
power.\12\ This is because the more demand response is able to reduce 
demand, the more downward pressure it places on generator bidding 
strategies by increasing the risk to a supplier that it will not be 
dispatched if it bids a price that is too high.\13\ Third, demand 
response has the potential to support system reliability and address 
resource adequacy \14\ and resource management challenges surrounding 
the unexpected loss of generation.\15\
---------------------------------------------------------------------------

    \9\ Wholesale Competition in Regions with Organized Electric 
Markets, Order No. 719-A, FERC Stats. & Regs. ] 31,292 (2009).
    \10\ ISO-RTO Council Report, Harnessing the Power of Demand: How 
ISOs and RTOs Are Integrating Demand Response into Wholesale 
Electricity Markets, found at http://www.isorto.org/atf/cf/
%7B5B4E85C6-7EAC-40A0-8DC3-003829518EBD%7D/IRC_DR_Report_
101607.pdf.
    \11\ Id. (``Demand response tends to flatten an area's load 
profile, which in turn may reduce the need to construct and use more 
costly resources during periods of high demand; the overall effect 
is to lower the average cost of producing energy.''). Similarly, 
NYISO ``has experienced a significant increase in the registration 
of the [demand response] programs that have effectively reduced the 
need for additional [generation] capacity resources to the system 
based on customer pledges to cut energy usage on demand.'' See 
NYISO's 2009 Comprehensive Reliability Plan at 3, found at http://
www.nyiso.com/public/webdocs/newsroom /planning_reports/CRP__
FINAL_5-19-09.pdf.
    \12\ See Comments of NYISO's Market Monitor filed in Docket No. 
ER09-1142-000, May 15, 2009 (Demand response ``contributes to 
reliability in the short-term, resource adequacy in the long-term, 
reduces price volatility and other market costs, and mitigates 
supplier market power.'').
    \13\ Id.
    \14\ See ISO-RTO Council Report, Harnessing the Power of Demand: 
How ISOs and RTOs Are Integrating Demand Response into Wholesale 
Electricity Markets at 4, found at http://www.isorto.org/atf/cf/
%7B5B4E85C6-7EAC-40A0-8DC3-003829518EBD%7D/IRC_DR_Report_
101607.pdf (``Demand response contributes to maintaining system 
reliability. Lower electric load when supply is especially tight 
reduces the likelihood of load shedding. Improvements in reliability 
mean that many circumstances that otherwise result in forced outages 
and rolling blackouts are averted, resulting in substantial 
financial savings. * * *''); Smart Grid Policy, 126 FERC ] 61,253, 
at P 19 and n.23 (2009) (``The Smart Grid concept envisions a power 
system architecture that permits two-way communication between the 
grid and essentially all devices that connect to it, ultimately all 
the way down to large consumer appliances. * * * Once that is 
achieved, a significant proportion of electric load could become an 
important resource to the electric system, able to respond 
automatically to customer-selected price or dispatch signals 
delivered over the Smart Grid infrastructure without significant 
degradation of service quality.'').
    \15\ For instance, in ERCOT, on February 26, 2008, through a 
combination of a sudden drop in power supplied by wind generators, a 
quicker-than-expected ramping up of demand, and the loss of thermal 
generation, ERCOT found itself short of reserves. The system 
operator called on all demand response resources, and 1200 MW of 
Load acting as Resource (LaaRs) responded within ten minutes, 
bringing ERCOT back into balance, from 59.85 Hz back to 60 Hz.
---------------------------------------------------------------------------

    5. Given its ability to lower electricity prices and ensure 
reliability, demand response can play a critical role in helping the 
Commission fulfill its mandate under the Federal Power Act (FPA) to 
ensure that rates charged for energy are just and reasonable.\16\ 
Accordingly, and consistent with national policy requiring facilitation 
of demand response,\17\ the Commission has acted to remove barriers to 
participation of demand response resources in organized wholesale 
electricity markets. For example, in Order No. 890, the Commission 
modified the pro forma Open Access Transmission Tariff to allow non-
generation resources, including demand response resources, to be used 
in the provision of certain ancillary services where appropriate on a 
comparable basis to service provided by generation resources.\18\ Order 
No. 890-A further requires transmission providers to develop 
transmission planning processes that treat all resources, including 
demand response, on a comparable basis.\19\
---------------------------------------------------------------------------

    \16\ 16 U.S.C. 824d (2006).
    \17\ See EPAct 2005, Public Law 109-58, Sec.  1252(f), 119 Stat. 
594, 965 (2005) (``It is the policy of the United States that * * * 
unnecessary barriers to demand response participation in energy, 
capacity, and ancillary service markets shall be eliminated.'').
    \18\ Preventing Undue Discrimination and Preference in 
Transmission Service, Order No. 890, FERC Stats. & Regs. ] 31,241 at 
P 887-88 (2007), order on reh'g, Order No. 890-A, FERC Stats. & 
Regs. ] 31,261 (2007), order on reh'g and clarification, Order No. 
890-B, 73 FR 39092 (Jul. 8, 2008), 123 FERC ] 61,299 (2008), order 
on reh'g, Order No. 890-C, 126 FERC ] 61,228 (2009), order on 
clarification, Order No. 890-D, 129 FERC ] 61,126 (2009).
    \19\ Order No. 890-A at P 216.
---------------------------------------------------------------------------

    6. The Commission built on these reforms in Order No. 719, 
requiring ISOs and RTOs to, among other things, accept bids from demand 
response resources in their markets for certain ancillary services on a 
basis comparable to other resources.\20\ The Commission also required 
each ISO and RTO ``to reform or demonstrate the adequacy of its 
existing market rules to ensure that the market price for energy 
reflects the value of energy during an operating reserve shortage,'' 
\21\ for purposes of encouraging existing generation and demand 
resources to continue to be relied upon during an operating reserve 
shortage, and encouraging entry of new generation and demand 
resources.\22\
---------------------------------------------------------------------------

    \20\ Order No. 719 at P 47-49.
    \21\ Id. P 194.
    \22\ Id. P 247.
---------------------------------------------------------------------------

B. Current ISO and RTO Demand Response Programs

    7. In addition to the foregoing efforts, the Commission has issued 
orders in recent years approving various types of ISO and RTO demand 
response programs. As noted above, some of these programs are 
administered for reliability and emergency conditions. Apart from these 
programs, wholesale customers and qualifying large retail customers may 
bid demand response directly into the day-ahead and real-time energy 
markets, certain ancillary service markets and capacity markets.\23\ 
Demand response providers participating as resources in the day-ahead 
and real-time energy markets are the subject of this proceeding.
---------------------------------------------------------------------------

    \23\ Other demand response programs allow demand response to be 
used as a capacity resource and as a resource during system 
emergencies or permit the use of demand response for synchronized 
reserves and regulation service. See, e.g., PJM Interconnection, 
LLC, 117 FERC ] 61,331 (2006); Devon Power LLC, 115 FERC ] 61,340, 
order on reh'g, 117 FERC ] 61,133 (2006), appeal pending sub nom., 
Maine Pub. Utils. Comm'n v. FERC, No. 06-1403 (DC Cir. 2007); New 
York Indep. Sys. Operator., Inc., 95 FERC ] 61,136 (2001); NSTAR 
Services Co. v. New England Power Pool, 95 FERC ] 61,250 (2001); New 
England Power Pool and ISO New England, Inc., 100 FERC ] 61,287, 
order on reh'g, 101 FERC ] 61,344 (2002), order on reh'g, 103 FERC ] 
61,304, order on reh'g, 105 FERC ] 61,211 (2003); PJM 
Interconnection, LLC, 99 FERC ] 61,227 (2002).
---------------------------------------------------------------------------

    8. With particular regard to demand response compensation for this 
latter category of resources, the Commission previously has allowed a 
system-by-system approach, whereby each RTO and ISO has developed its 
own compensation methodologies for demand response resources in its 
energy market. As a result, the levels of compensation for demand 
response vary significantly among RTOs and ISOs. PJM pays the 
Locational Marginal Price (LMP) \24\ minus the generation and 
transmission portions of the retail rate.\25\ ISO-NE and NYISO 
currently pay LMP

[[Page 15365]]

when prices are above a threshold level, with the levels differing 
between the RTOs.\26\ The Midwest ISO currently has a program that pays 
LMP for demand response in the real-time energy market when the demand 
response provider has purchased the amount reduced in the day-ahead 
market for energy and ancillary services.\27\ CAISO pays LMP in its 
participating load program that allows qualifying resources to provide 
day-ahead and real-time energy and non-spinning reserves.\28\ SPP 
currently has no demand response program at all.\29\ ISOs and RTOs have 
continued to examine the effectiveness of demand response compensation 
in their respective regions, and, as a result, the issue of proper 
compensation continues to be the subject of several proceedings.\30\
---------------------------------------------------------------------------

    \24\ LMP refers to the price calculated by the ISO or RTO at 
particular locations or electrical nodes within the ISO or RTO 
footprint and is used as the market price to compensate generators. 
There are variations in the way ISOs and RTOs calculate LMP; 
however, each method establishes the marginal value of resources in 
that market. Nothing in this NOPR is intended to change ISO and RTO 
methods for calculating LMP.
    \25\ PJM FERC Electric Tariff, Sixth Revised Sheet No. 388D.01.
    \26\ For example, under ISO-NE's Real Time Price Response 
Program, the minimum bid is $100/MWh and a demand response resource 
is paid the higher of LMP or $100/MWh. See Section III.1.3 of the 
ISO New England Transmission, Markets and Services Tariff, Section 1 
of the Second Restated New England Power Pool Agreement. NYISO 
implements a day-ahead demand response program by which resources 
bid into the market at a minimum of $75/MWh and can get paid the 
LMP. See NYISO Incentivized Day-Ahead Economic Load Curtailment 
Program, Fifth Revised Tariff Sheet No. 34-34A, 89.
    \27\ See Charges and Credits for Real-Time Energy and Operating 
Reserve Market Energy Purchases and Sales Associated with Demand 
Response Resources. Midwest ISO FERC Electric Tariff, Fourth Revised 
Volume No. 1, Second Revised Sheet No. 1114.
    \28\ See section 11.2.1.1 IFM Payments for Supply of Energy, 
CAISO FERC Electric Tariff.
    \29\ However, the Commission has directed SPP to report on ways 
it can incorporate demand response into its imbalance market. 
Southwest Power Pool, Inc., 114 FERC ] 61,289, at P 229 (2006). In 
its orders addressing SPP's compliance with Order No. 719, the 
Commission also directed SPP to make a subsequent compliance filing 
addressing demand response participation in its organized markets. 
Southwest Power Pool, Inc., 129 FERC ] 61,163, at P 51 (2009).
    \30\ See PJM Interconnection, LLC, Docket No. EL09-68-000; ISO 
New England, Inc., Docket No. ER09-1051-000; ISO New England, Inc., 
Docket No. ER08-830-000; Midwest Indep. Transmission Sys. Operator, 
Inc., Docket No. ER09-1049-000.
---------------------------------------------------------------------------

C. The Need for Reform

    9. Despite the benefits of demand response and various efforts by 
the Commission, ISOs and RTOs to address barriers to and compensation 
for demand response participation, demand response providers 
collectively play a small role in wholesale markets. After several 
years of observing demand response participation in ISO and RTO markets 
with different, and often evolving, demand response compensation 
structures, the Commission is concerned that some existing, inadequate 
compensation structures have hindered the development and use of demand 
response. The impediment has been addressed at Commission-sponsored 
technical conferences concerning demand response, where participants 
have confirmed that customers ``must have confidence that appropriate 
price signals will be sustained by stable competitive pricing 
structures, before they will make an investment in demand response.'' 
\31\ Some participants have advised that demand response quite simply 
will not occur without adequate compensation.\32\
---------------------------------------------------------------------------

    \31\ Transcript of Order No. 719 technical conference at 24, 
statement by James Eber, Director of Demand Response at Commonwealth 
Edison, found at http://www.ferc.gov/EventCalendar/
EventDetails.aspx?ID=3994&CalType=%20&CalendarID=116&Date=05/21/
2008&View=Listview.
    \32\ See Statements of Larry Stalica, Vice President, Linde 
Energy Services, Inc. FERC Technical Conference--Demand Response in 
Organized Electric Markets, May 21, 2008, found at http://
www.ferc.gov/EventCalendar/Files/20080521081612-
Stalica,%20Linde%20Energy%20Services.pdf. (``The mere avoidance of 
electricity prices often provides insufficient value to offset these 
real costs. Demand response will not occur if customers do not have 
an economic incentive to reduce consumption.'').
---------------------------------------------------------------------------

    10. Indeed, there are indications that demand response resources 
react correspondingly to increases or decreases in payment. PJM 
provides a case study on this point. It first implemented its Economic 
Load Response Program (Economic Program) providing for demand response 
compensation in June 2002.\33\ Several years later, starting in January 
2008, when PJM reduced its compensation for demand response, settled 
demand reductions began decreasing from previous years.\34\ 
Specifically, PJM's Market Monitor noted that, from 2007 to 2008, 
following the decrease in compensation, settled demand reductions 
decreased by 36.8 percent, from 714,200 MWh to 458,300 MWh, and the 
decline has continued at least through March 2009.\35\ Although the 
Commission had rejected a request to prevent the compensation decrease 
from occurring as per the terms of PJM's then-existing tariff, the 
Commission encouraged PJM and its stakeholders to continue analyzing 
the effectiveness of PJM's demand response program with the decreased 
payments for demand response.\36\ Based upon our own review, the 
Commission is now concerned that evidence of demand reductions in PJM, 
and inadequate demand response participation, now and in the future, 
may be the result of compensation that is no longer just and 
reasonable, because, as detailed below, the existing and varying levels 
of compensation generally fail to reflect the marginal value of demand 
response resources to ISO and RTO energy markets.
---------------------------------------------------------------------------

    \33\ See PJM Interconnection, LLC, 99 FERC ] 61,227 (2002). 
PJM's Economic Program provided for payment of LMP for all demand 
response reductions when LMP equaled or exceeded $75/MWh and paid 
LMP minus the generation and transmission components of the retail 
rate when LMP was less than $75/MWh.
    \34\ The tariff provision providing for payment of LMP when LMP 
equaled or exceeded $75/MWh terminated by its terms on December 31, 
2007, and, since then, PJM has paid only LMP minus the generation 
and transmission components of the retail rate.
    \35\ Monitoring Analytics, Barriers to Demand Side Response in 
PJM at 22 (July 1, 2009).
    \36\ PJM Interconnection, LLC, 121 FERC ] 61,315, at P 29 
(2007).
---------------------------------------------------------------------------

II. Discussion

    11. Given the importance of demand response resources to the 
competitiveness of organized wholesale electricity markets, and based 
upon our experience to date with demand response in the ISO- and RTO-
administered markets, the Commission proposes to address compensation 
for demand response resources participating in organized wholesale 
energy markets generically in this proceeding. The Commission proposes 
to add section 35.18(g)(1)(v) to our regulations to establish a 
specific compensation approach for demand response resources 
participating in organized wholesale energy markets (such as the day-
ahead and real-time markets administered by the ISOs and RTOs). Under 
the proposed section, each Commission-approved ISO and RTO that has a 
tariff provision providing for participation of demand response 
resources in its energy market must pay demand response resources, in 
all hours, the market price for energy, i.e., full LMP, for demand 
reductions made in response to price signals.\37\
---------------------------------------------------------------------------

    \37\ This provision will not apply to programs that ISOs and 
RTOs administer for reliability or emergency conditions. In those 
situations, the ISO and RTO tariffs may provide compensation that is 
not necessarily related solely to energy prices but is designed to 
prevent involuntary load curtailment.
---------------------------------------------------------------------------

    12. The Commission proposes to take this action generically to 
address issues that are common to the RTO and ISO markets in a 
coordinated manner in a single proceeding. As discussed further below, 
we believe paying demand response resources the LMP in all hours will 
compensate those resources in a manner that reflects the marginal value 
of the resource to each RTO and ISO, comparable to treatment of 
generation resources. This will improve the competitiveness of the 
organized wholesale energy markets and, in turn, help to ensure that 
energy prices in those markets are just and reasonable.
    13. As explained above, we have previously accepted a variety of 
ISO and

[[Page 15366]]

RTO proposals for compensation for demand response providers, with 
different levels of payment. As we have gained experience with these 
programs, we are concerned that the current compensation levels appear 
to have become unjust and unreasonable. Providers may submit price and 
quantity bids into the organized wholesale energy markets and the 
market clears at the marginal resource yet they fail to compensate 
demand response at levels that reflect the marginal value of the 
resource being used by the RTO or ISO to balance supply and demand. The 
current wholesale compensation levels may therefore be leading to 
under-investment in demand response resources, resulting in higher, and 
unjust and unreasonable, prices in the organized electricity markets. 
To help ensure that wholesale prices in ISOs and RTOs remain just and 
reasonable, we are proposing to require each ISO and RTO to pay the LMP 
to demand response providers participating in the organized wholesale 
energy markets.
    14. It is a well-established practice in the organized wholesale 
energy markets to rely on LMPs to encourage efficient behavior by 
market participants. The LMP represents the value of additional supply 
or reductions in consumption at each node within the RTO or ISO and, 
thus, reflects the marginal cost of the last unit necessary to 
efficiently balance supply and demand.\38\ The LMP is therefore the 
primary mechanism for compensating generation resources clearing in the 
organized electricity markets, which the Commission has found 
encourages ``more efficient supply and demand decisions in both the 
short run and long run.'' \39\
---------------------------------------------------------------------------

    \38\ See ISO New England, Inc., 100 FERC ] 61,287, at P 71 
(2002) (LMP ``provide[s] appropriate price signals indicating the 
value of additional resources or conservation at each node in the 
transmission system''); Cleco Power LLC, et al., 103 FERC ] 61,272, 
at P 67 (2003) (``It is widely observed that markets work 
efficiently when prices reflect marginal costs, i.e., when the 
market price will be equal to the cost of bringing to market the 
last unit necessary to balance supply and demand.'').
    \39\ See New England Power Pool, 101 FERC ] 61,344, at P 35 
(2002).
---------------------------------------------------------------------------

    15. Given that the LMP represents the marginal value of the 
resource being used by the RTO or ISO to balance supply and demand, it 
follows that the LMP should be paid to any resource clearing in the 
RTO's or ISO's energy market. In balancing supply and demand, a one 
megawatt reduction in demand is equivalent to a one megawatt increase 
in energy for purposes of meeting load requirements and maintaining a 
reliable electric system. The ISO or RTO is able to avoid dispatching 
suppliers with higher bids, be they generation or demand response, by 
accepting a lower bid to either reduce consumption or increase 
generation. As Dr. Alfred E. Kahn noted in a recent PJM proceeding in 
Docket No. EL09-68-000, consumers offering to reduce consumption should 
be induced ``to behave as they would if the market mechanisms alone 
were capable of rewarding them directly for efficient economizing.'' 
\40\ This is because ``the (incremental) costs saved by curtailments in 
demand clearly will be LMP--including the marginal costs of generation. 
So, in the end the LMP inducement is the economically correct one.'' 
\41\ This appears to be true across all ISOs and RTOs and, therefore, 
it appears appropriate to compensate both generation and demand 
response resources participating in the organized wholesale electricity 
markets at the LMP.
---------------------------------------------------------------------------

    \40\ Kahn Affidavit at 4.
    \41\ Id. at 3.
---------------------------------------------------------------------------

    16. Ultimately, the markets themselves will determine the level of 
generation and demand response resources needed to balance energy and 
demand. The level of compensation provided to each resource, however, 
affects its willingness and ability to participate in the market.\42\ 
For example, demand response resources need to make investments in 
technologies to enable participation in the organized wholesale energy 
markets, as well as incur costs in changing their operations in order 
to provide demand response. In those markets paying less than the LMP 
to demand response resources, such resources have less revenues to 
support investment in demand response-enabling technology (such as 
metering equipment, energy usage monitors and process controls) 
necessary to enable more wholesale market participation by demand 
response resources. Where compensation for demand response is 
inadequate, demand response resources will be hesitant to invest in 
demand response devices. Compared to existing compensation levels, 
paying the LMP in all hours should allow more demand response resources 
to cover their investment costs and increase their ability to 
participate in the organized wholesale electric markets.
---------------------------------------------------------------------------

    \42\ Generation and demand response resources have the potential 
to earn other revenues through bilateral arrangements, capacity 
markets where they exist, and ancillary services.
---------------------------------------------------------------------------

    17. Increased levels of demand response participation, in turn, 
should lead to lower clearing prices in the organized wholesale energy 
markets. As the Commission explained in accepting PJM's Economic Load 
Response Program:

    Without a demand response mechanism, [an independent system 
operator] is forced to work under the assumption that all customers 
have an inelastic demand for energy and will pay any price for 
power. There is ample evidence that this is not true. Many 
customers, given the right tools, can and will manage their demand. 
* * * A working demand response program puts downward pressure on 
price, because suppliers have additional incentives to keep bids 
close to their marginal production costs and high supply bids are 
more likely to reduce the bidder's energy sales. Appropriate price 
signals to customers thus helps to mitigate market power as high 
supply bids are more likely to reduce the bidders' energy sales. 
Suppliers thus have additional incentive to keep bids close to their 
marginal production costs.\43\

    \43\ PJM Interconnection, LLC, 99 FERC ] 61,227, at 61,939 
(2002) (quoting PJM Interconnection, LLC, 99 FERC ] 61,139, at 
61,573 (2002)).

    18. Additionally, increasing the aggregate amount of demand 
response resources in the organized wholesale energy markets will help 
to move prices closer to the levels that would result if all demand 
could respond to the marginal cost of energy. Paying the LMP to those 
potential demand response resources who are capable of responding--but 
who have not been participating as a resource due to inadequate 
compensation--should bring those additional demand response resources 
into the organized wholesale energy markets. But again, the markets 
themselves will determine the appropriate level of demand response, and 
generation, resources needed by the ISO and RTO to balance energy and 
demand based on their relative bids into the markets.
    19. We recognize that the appropriate level of compensation for 
demand response resources participating in organized wholesale energy 
markets has been the subject of debate. In various proceedings, some 
parties have advocated payment of LMP minus components of the retail 
rate, on the theory that such an approach permits all consumers to 
react as if they were paying LMP.\44\ Some parties have argued that 
payment of LMP is appropriate only during the most expensive hours,\45\ 
on the theory that

[[Page 15367]]

demand response will have the greatest impact during those hours in 
which the aggregate supply curve is steep (i.e., when supply is less 
elastic). Given the current barriers to demand response \46\ and the 
evolving nature of the technology enabling demand response, a perfect 
solution or payment scheme may not exist. We nonetheless believe that 
paying LMP in all hours to the demand response resources that can 
participate in the organized wholesale energy markets is the correct 
approach at this time, because that payment reflects the marginal 
effect of each demand response resource in the hour, just as the LMP 
reflects the marginal effect of generation resources in each hour. LMP 
is the marginal value of both demand response and generation in any 
hour, regardless of whether it is morning or evening, daytime or 
nighttime, weekday or weekend.\47\
---------------------------------------------------------------------------

    \44\ Professor William W. Hogan has argued, for instance, that 
payment of LMP (without an offset for some portion of the retail 
rate) over-compensates individual demand response providers and 
might result in more demand response than is efficient. See 
Attachment to Answer of Electric Power Supply Association, Providing 
Incentives for Efficient Demand Response, William W. Hogan, October 
29, 2009, submitted in Docket No. EL09-68-000.
    \45\ See PJM's Transmittal Letter at 29 submitted in Docket No. 
EL09-68-000.
    \46\ A recent Commission Staff report details several barriers 
to demand response, including regulatory barriers, such as lack of a 
direct connection between wholesale and retail prices, lack of 
dynamic prices, measurement and verification challenges, lack of 
real-time information sharing, and ineffective demand response 
program design; technological barriers, such as lack of advanced 
metering infrastructure and the high cost of some enabling 
technologies; and other barriers, such as lack of customer awareness 
and education. Federal Energy Regulatory Commission Staff, A 
National Assessment of Demand Response Potential (June 2009), found 
at http://www.ferc.gov/legal/staff-refports/06-09-demand-
response.pdf. In compliance filings submitted by RTOs and ISOs and 
their market monitors pursuant to Order No. 719, as well as in 
responsive pleadings, parties have mentioned additional barriers, 
such as the inability of demand response resources to set LMP, 
minimum size requirements, and others.
    \47\ We note that in PJM, 17 percent of load reductions by 
demand response resources for that year occurred between the non-
peak hours of 11 p.m. and 8 a.m. See 2008 State of the Market Report 
for PJM, Volume 2, Table 2-93 at 103, found at http://
www.monitoringanalytics.com/reports/PJM_State_of_the_Market/
2008/2008-som-pjm-volume2.pdf.
---------------------------------------------------------------------------

    20. We, nevertheless, seek comment on the need to compensate demand 
response acting as a resource in organized wholesale energy markets. 
Commenters may address whether current compensation for demand response 
providers acting as a resource in the organized wholesale energy 
markets is adequately procuring demand response. We further solicit 
comment on alternative approaches to compensating demand response 
resources participating in organized wholesale energy markets, and the 
merit of those approaches in comparison to the one proposed here. In 
particular, we ask for comment on whether a reduction in consumption is 
comparable to an increase in electricity production for purposes of 
balancing supply and demand, and whether, therefore, demand response 
providers and generators should receive comparable compensation. We 
further seek comment on whether paying LMP to demand response resources 
is comparable compensation or is more or less than comparable to 
compensation paid to generation in the ISO and RTO energy markets. We 
also request comment on whether payment of LMP should apply to all 
hours, and, if not, the criteria that should be used for establishing 
the hours when LMP should apply. Additionally, we seek comment on 
whether requiring payment of LMP is appropriate across all ISOs and 
RTOs, or whether variations among ISOs and RTOs justify varying levels 
of demand response resource compensation. To that end, we further seek 
comment on whether the Commission should allow regional variations for 
an ISO or RTO that does not seek to compensate demand response 
resources participating in the organized wholesale energy market.
    21. Organized wholesale energy markets are evolving and, as such, 
the rules and regulations related to those markets will continue to 
evolve. This is no less so for demand response, as the markets, and the 
types of demand response participating in them, continue to evolve. 
Therefore, it may be necessary in the future for industry and the 
Commission to reassess the appropriate method for compensating demand 
response resources in organized wholesale energy markets.\48\ 
Accordingly, we also seek comment on whether, and under what 
circumstances, the Commission should conduct periodic reviews of demand 
response compensation and the criteria that should be used in making 
such assessments.
---------------------------------------------------------------------------

    \48\ Indeed, the Commission's proposed action in this proceeding 
is evidence of our continuing assessment of compensation for demand 
response resources. In PJM Interconnection, LLC, 121 FERC ] 61,315 
(2007), the Commission rejected a complaint that PJM's existing 
compensation for demand response (LMP minus the generation and 
transmission components of the retail rate) was unjust and 
unreasonable, finding that there was insufficient evidence at the 
time to make such a finding. As we have acquired more experience 
with the participation of demand response resources in the organized 
wholesale energy markets, we are concerned that compensation for 
demand response in PJM and other RTO and ISO markets may no longer 
be just and reasonable.
---------------------------------------------------------------------------

    22. With specific regard to the proposed regulatory text set forth 
below, we seek comments on whether terms such as ``expected levels,'' 
``price signals,'' and ``market prices'' are sufficiently defined.
    23. Because we are addressing generically in this rulemaking 
proceeding the same issues raised in the PJM proceeding in Docket No. 
EL09-68-000, that docket is hereby terminated.\49\ The Commission will 
take administrative notice of the record in the PJM proceeding so that 
parties in that proceeding need not refile affidavits or other evidence 
introduced there.
---------------------------------------------------------------------------

    \49\ See Michigan Pub. Power Agency v. Midwest Indep. 
Transmission Sys. Operator, Inc., 128 FERC ] 61,268, at P 29 n.47 
(2009) (Commission has discretion to decide when and where it will 
resolve an issue).
---------------------------------------------------------------------------

III. Information Collection Statement

    24. The Office of Management and Budget (OMB) requires that OMB 
approve certain information collection and data retention requirements 
imposed by agency rules.\50\ Therefore, the Commission is submitting 
the proposed modifications to its information collections to OMB for 
review and approval in accordance with section 3507(d) of the Paperwork 
Reduction Act of 1995.\51\
---------------------------------------------------------------------------

    \50\ 5 CFR 1320.11(b) (2009).
    \51\ 44 U.S.C. 3507(d) (2006).
---------------------------------------------------------------------------

    25. The Office of Management and Budget's (OMB) regulations require 
approval of certain information collection requirements imposed by 
agency rules. Upon approval of a collection(s) of information, OMB will 
assign an OMB control number and an expiration date. Respondents 
subject to the filing requirements of a rule will not be penalized for 
failing to respond to these collections of information unless the 
collections of information display a valid OMB control number.
    26. The Commission is submitting these reporting requirements to 
OMB for its review and approval under section 3507(d) of the Paperwork 
Reduction Act. Comments are solicited on the Commission's need for this 
information, whether the information will have practical utility, the 
accuracy of provided burden estimates, ways to enhance the quality, 
utility, and clarity of the information to be collected, and any 
suggested methods for minimizing the respondent's burden, including the 
use of automated information techniques.
    Burden Estimate: The Public Reporting burden for the requirements 
contained in the NOPR is as follows:

[[Page 15368]]



----------------------------------------------------------------------------------------------------------------
                                                 Number of        Number of        Hours per       Total annual
               Data collection                  respondents       responses         response          hours
----------------------------------------------------------------------------------------------------------------
FERC-516
Transmission Organizations with Organized                  6                1                6               36
 Electricity Markets........................
----------------------------------------------------------------------------------------------------------------

    Information Collection Costs: The Commission seeks comments on the 
costs to comply with these requirements. The Commission has projected 
the average annualized cost of all respondents to be the following: 36 
hours @ $220 per hour = $7,920 for respondents. No capital costs are 
estimated to be incurred by respondents.
    Title: FERC-516 ``Electric Rate Schedule Tariff Filings''.
    Action: Proposed Collections.
    OMB Control No: 1902-0096.
    Respondents: Business or other for profit, and/or not for profit 
institutions.
    Frequency of Responses: One time to initially comply with the rule, 
and then on occasion as needed to revise or modify.
    27. Necessity of the Information: The information from FERC-516 
enables the Commission to exercise its statutory obligation under 
Sections 205 and 206 of the FPA. FPA section 205 specifies that all 
rates and charges, and related contracts and service conditions for 
wholesale sales and transmission of energy in interstate commerce be 
filed with the Commission and must be ``just and reasonable.'' In 
addition, FPA section 206 requires the Commission upon complaint or its 
own motion, to modify existing rates or services that are found to 
unjust, unreasonable, unduly discriminatory or preferential. The 
Commission needs sufficient detail to make an informed and reasonable 
decision concerning the appropriate level of rates, and the 
appropriateness of non-rate terms and conditions, and to aid customers 
and other parties who may wish to challenge the rates, terms, and 
conditions proposed by the utility.
    28. This proposed rule, if adopted, would amend the Commission's 
regulations to obligate ISOs and RTOs to pay the market price for 
energy to demand response resources for demand reductions within each 
respective ISO and RTO region. Requiring ISOs and RTOs to pay the 
market price for energy to demand response resources for demand 
reductions in response to price signals will potentially reduce the 
market clearing price of electricity. The Commission has emphasized the 
importance of demand response as a vehicle for improving the 
competitiveness of organized wholesale electricity markets and ensuring 
supplies of energy at just, reasonable and not unduly discriminatory or 
preferential rates.\52\
---------------------------------------------------------------------------

    \52\ Order No. 719 at P 16.
---------------------------------------------------------------------------

    29. Internal review: The Commission has reviewed the requirements 
pertaining to organized wholesale electric markets and determined the 
proposed requirements are necessary to its responsibilities under 
sections 205 and 206 of the FPA.
    30. These requirements conform to the Commission's plan for 
efficient information collection, communication and management within 
the energy industry. The Commission has assured itself, by means of 
internal review, that there is specific, objective support for the 
burden estimates associated with the information requirements.
    31. Interested persons may obtain information on the reporting 
requirements by contacting: Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426 [Attention: Michael Miller, 
Office of the Executive Director, Phone: (202) 502-8415, fax: (202) 
273-0873, e-mail: michael.miller@ferc.gov]. Comments on the 
requirements of the proposed rule may also be sent to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Washington, DC 20503 [Attention: Desk Officer for the Federal Energy 
Regulatory Commission], e-mail: oira_submission@omb.eop.gov.

IV. Environmental Analysis

    32. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\53\ The 
Commission concludes that neither an Environmental Assessment nor an 
Environmental Impact Statement is required for this NOPR under section 
380.4(a)(15) of the Commission's regulations, which provides a 
categorical exemption for approval of actions under sections 205 and 
206 of the FPA relating to the filing of schedules containing all rates 
and charges for the transmission or sale of electric energy subject to 
the Commission's jurisdiction, plus the classification, practices, 
contracts and regulations that affect rates, charges, classifications, 
and services.\54\
---------------------------------------------------------------------------

    \53\ Order No. 486, Regulations Implementing the National 
Environmental Policy Act, 52 FR 47897, FERC Stats. & Regs. 
Regulations Preambles 1986-1990 ] 30,783 (1987).
    \54\ 18 CFR 380.4(a)(15) (2009).
---------------------------------------------------------------------------

V. Regulatory Flexibility Act Certification

    33. The Regulatory Flexibility Act of 1980 (RFA) \55\ generally 
requires a description and analysis of final rules that will have 
significant economic impact on a substantial number of small 
entities.\56\ ISOs and RTOs, not small entities, are impacted directly 
by this rule.
---------------------------------------------------------------------------

    \55\ 5 U.S.C. 601-12 (2000).
    \56\ The RFA definition of ``small entity'' refers to the 
definition provided in the Small Business Act, which defines a 
``small business concern'' as a business that is independently owned 
and operated and that is not dominant in its field of operation. See 
15 U.S.C. 601(3) (2000) (citing to section 3 of the Small Business 
Act, 15 U.S.C. 632 (2000)). The Small Business Size Standards 
component of the North American Industry Classification system 
defines a small utility as one that, including its affiliates, is 
primarily engaged in the generation, transmission, or distribution 
of electric energy for sale, and whose total electric output for the 
preceding fiscal years did not exceed 4 MWh. 13 CFR 121.202 (Sector 
22, Utilities, North American Industry Classification System, NAICS) 
(2004).
---------------------------------------------------------------------------

    34. California Independent System Operator Corp. (CAISO) is a non-
profit organization comprised of more than 90 electric transmission-
owning companies and generators operating in its markets and serving 
more than 30 million customers.
    35. New York Independent System Operator, Inc. (NYISO) is a non-
profit organization that oversees wholesale electricity markets serving 
19.2 million customers. NYISO manages a 10,775-mile network of high-
voltage lines.
    36. PJM Interconnection, LLC (PJM) is comprised of more than 450 
members including power generators, transmission owners, electricity 
distributors, power marketers, and large industrial customers, serving 
13 States and the District of Columbia.
    37. Southwest Power Pool, Inc. (SPP) is comprised of 50 members 
serving 4.5 million customers in eight States and has 52,301 miles of 
transmission lines.
    38. Midwest Independent Transmission System Operator, Inc. (Midwest 
ISO) is a non-profit organization with over 131,000

[[Page 15369]]

megawatts of installed generation. Midwest ISO has 93,600 miles of 
transmission lines and serves 15 States and one Canadian province.
    39. ISO New England, Inc. (ISO-NE) is a regional transmission 
organization serving six States in New England. The system is comprised 
of more than 8,000 miles of high-voltage transmission lines and several 
hundred generation facilities, of which more than 350 are under ISO-
NE's direct control.
    40. The Commission believes this rule will not have a significant 
economic impact on a substantial number of small entities, and 
therefore no regulatory flexibility analysis is required.

VI. Comment Procedures

    41. The Commission invites interested persons to submit comments on 
the proposed regulatory text that commenters may wish to discuss. 
Comments are due 45 days after publication in the Federal Register. 
Comments must refer to Docket No. RM10-17-000,\57\ and must include the 
commenter's name, the organization they represent, if applicable, and 
their address in their comments.
---------------------------------------------------------------------------

    \57\ Because this NOPR terminates Docket No. EL09-68-000, 
comments should not refer to that proceeding.
---------------------------------------------------------------------------

    42. The Commission encourages comments to be filed electronically 
via the eFiling link on the Commission's Web site at http://
www.ferc.gov. The Commission accepts most standard word processing 
formats. Documents created electronically using word processing 
software should be filed in native applications or print-to-PDF format 
and not in a scanned format. Commenters filing electronically do not 
need to make a paper filing.
    43. Commenters that are not able to file comments electronically 
must send an original and 14 copies of their comments to: Federal 
Energy Regulatory Commission, Secretary of the Commission, 888 First 
Street, NE., Washington, DC 20426.
    44. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

VII. Document Availability

    45. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
Eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.
    46. From FERC's Home Page on the Internet, this information is 
available on eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number excluding the last three digits of this document in the docket 
number field.
    47. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from FERC Online Support at (202) 
502-6652 (toll free at 1-866-208-3676) or e-mail at 
ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. E-mail the Public Reference Room at 
public.referenceroom@ferc.gov.

List of Subjects in 18 CFR Part 35

    Electric power rates, Electric utilities, Reporting and 
recordkeeping requirements.

    By direction of the Commission. Commissioner Moeller is 
concurring in part and dissenting in part with separate statement 
attached.

Nathaniel J. Davis, Sr.,
Deputy Secretary.

    In consideration of the foregoing, the Commission proposes to amend 
Chapter I, Title 18 of the Code of Federal Regulations as follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

    1. The authority citation for part 35 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.

    2. Amend Sec.  35.28 by adding paragraph (g)(1)(v) to read as 
follows:


Sec.  35.28  Non-discriminatory open access transmission tariff.

* * * * *
    (g) * * *
    (1) * * *
    (v) Demand response compensation in energy markets. Each 
Commission-approved independent system operator or regional 
transmission organization that has a tariff provision permitting demand 
response resources to participate as a resource in the energy market by 
reducing consumption of electric energy from their expected levels in 
response to price signals must pay to those demand response providers, 
in all hours, the market price for energy for these reductions.
* * * * *

    Note: The following material will not appear in the Code of 
Federal Regulations.

UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION

Demand Response Compensation in Organized Wholesale Energy Markets, 
Docket No. RM10-17-000
PJM Interconnection, L.L.C., Docket No. EL09-68-000

Issued March 18, 2010.

    MOELLER, Commissioner, concurring, in part and dissenting, in part:
    As our country's demand for energy increases, the reduction of 
energy usage through demand response programs will play a critical role 
in meeting our needs and it is my hope that this nascent industry will 
thrive and succeed. In the Energy Policy Act of 2005, Congress 
established a policy to encourage the use of demand response by: (1) 
facilitating the deployment of technology to enable customers to 
participate in demand response programs; and (2) eliminating 
unnecessary barriers to demand response participation.\1\
---------------------------------------------------------------------------

    \1\ Energy Policy Act of 2005, Pub. L. No. 109-58 Sec.  1252(f), 
119 Stat. 594 (2005).
---------------------------------------------------------------------------

    Even before this law was passed, this Commission supported similar 
policies in the organized electric markets by encouraging the use of 
price responsive demand during high priced energy periods.\2\
---------------------------------------------------------------------------

    \2\ PJM Interconnection, L.L.C., 99 FERC ] 61,227, at 61,943 
(2002) see also Order No. 719 at P 16 (``Thus, enabling demand-side 
resources * * * improves the economic operation of electric power 
markets by aligning prices more closely with he value customers 
place on electric power.'')
---------------------------------------------------------------------------

    Demand response is playing an increasingly critical role in our 
nation's energy supply mix. Additional demand response has the 
potential to produce more efficient market outcomes, contribute to a 
cleaner environment,\3\ result in lower costs to customers, and help to 
check market power since it provides a countervailing willingness to 
reduce demand in the face of high prices.\4\ With respect to prices, 
studies have shown that sometimes a small decrease in demand from 
demand response resources during peak periods can significantly reduce 
market prices. In sum, the benefits that demand

[[Page 15370]]

response resources can bring to the energy markets are proven and 
significant.
---------------------------------------------------------------------------

    \3\ A recent report by the National Research Council, Hidden 
Costs of Energy: Unpriced Consequences of Energy Production and Use, 
provides estimates of the cost associated with air pollution as the 
result of energy production.
    \4\ California Indep. Sys. Operator Corp., 116 FERC ] 61,274, at 
P 689.
---------------------------------------------------------------------------

    The initial success of demand response has resulted in a steady 
maturation of the demand response industry. However, as the industry 
continues to mature, we must ensure that our policies are properly 
tailored to guide the development of demand response in a manner that 
will result in economically-efficient outcomes. Moving too quickly to 
reach a desired result can result in unintended consequences--and I 
believe that today's decision to propose a standard payment could have 
unintentional effects on both demand response participation and the 
efficient operation of the organized markets over the longer term.
    In today's notice of proposed rulemaking (NOPR), the majority 
concludes that the Commission should require a standard payment to 
compensate demand response resources. Specifically, the majority's 
proposed outcome would be that these resources are paid the market 
price (i.e., the locational marginal price or ``LMP'') for energy 
reductions in all 8,760 hours of the year. This determination is 
followed by questions such as whether other compensation designs could 
also work; questions that I believe would have been more appropriately 
asked prior to establishing this NOPR.\5\ For that reason, I believe 
that a preliminary issuance (such as a Notice of Inquiry) should have 
been established to collect and analyze the evidence in advance of 
initiating a formal rulemaking proceeding.
---------------------------------------------------------------------------

    \5\ To the extent that this NOPR asks questions to determine 
whether the proposed rule is just and reasonable, I concur.
---------------------------------------------------------------------------

    While the majority claims that it is ``concerned that compensation 
for demand response in PJM and other RTO and ISO markets may no longer 
be just and reasonable'', the NOPR lacks a thorough discussion of the 
evidence that they relied upon to substantiate their concerns.\6\ The 
NOPR also lacks a sufficient explanation of the ``experience'' that 
FERC has recently gained that would otherwise support the conclusion 
that the organized electric markets ``fail to compensate demand 
response at levels that reflect the marginal value of the resource 
being used by the RTO or ISO to balance supply and demand.'' \7\
---------------------------------------------------------------------------

    \6\ NOPR at n. 57. In support of the conclusion that 
compensation may no longer be just and reasonable, the preamble 
provides an example involving PJM's Economic Load Response Program 
and the drop of settled demand reductions experienced after the 
subsidy payments expired per the terms of PJM's tariff. NOPR at P 
10. While the cited level of reduction is a fact, the PJM market 
monitor stated that ``[w]hile the removal of the incentive program, 
effective November 2007, may have reduced participation, the exact 
role of the elimination of the incentive program is not known 
because there were changes to other key factors which directly 
impact participation.'' Citing Monitoring Analytics, Barriers to 
Demand Side Response in PJM, at 22 (July 1, 2009). More recently, 
the PJM market monitor recognized that between 2008 and 2009, 
``[t]here were many factors contributing to the lower levels of 
participation and lower revenues in the Economic Program, including 
lower price levels in 2009, lower load levels, and improved 
measurement and verification.'' Notably, while payments from the 
Economic Program have fallen substantially since 2007, capacity 
revenue for demand response has increased significantly (rising 114% 
to $303 million from 2008 to 2009). Citing Monitoring Analytics, 
State of the Market Report for PJM, at 111 (March 11, 2010).
    \7\ NOPR at P 13.
---------------------------------------------------------------------------

    To the contrary, the record in Docket No. EL09-68-000 shows wide 
disagreement in the industry regarding the issue of demand response 
compensation. In that proceeding, State utility commissions,\8\ the 
grid operator, industry economists, and the market participants all 
reached various conclusions regarding the question of how to compensate 
demand response resources in PJM.\9\ In light of such rigorous debate, 
I am not sure if the Commission has a sustainable rationale to support 
a finding that the proposed rule is just and reasonable and that the 
existing compensation methods (that have been approved by this 
Commission) are no longer just and reasonable.
---------------------------------------------------------------------------

    \8\ Compare the position of the Indiana Utility Regulatory 
Commission (i.e., LMP less the generation portion of retail rates 
(LMP-G) is an accepted indication of cost-effectiveness) with the 
position taken by the New Jersey Board of Public Utilities and the 
District of Columbia Public Service Commission (i.e., compensation 
for demand response should be based solely on LMP). Comments filed 
in Docket No. EL09-68-000.
    \9\ While there appears to be no disagreement that the correct 
price signal for all customers is the LMP, the debate centers on 
whether demand response resources should be paid the LMP or should 
realize the value of LMP if they choose to reduce demand. 
Additionally, at certain times, the LMP can become negative, meaning 
that generators must pay into the market to the extent they generate 
power. Should demand response resources likewise be required to pay 
into the market during negative LMP events, or should they be 
exempt?
---------------------------------------------------------------------------

    In fact, only recently did the Commission issue an order that not 
only sustained the manner by which PJM compensates demand response 
resources but also encouraged PJM and its stakeholders to identify and 
analyze issues to improve their demand response program.\10\ 
Subsequently, PJM filed a detailed report explaining that while the 
stakeholder process did not yield a consensus position, the PJM Board 
moved forward and developed a compromise solution that was designed to 
strengthen its demand response markets.\11\ In lieu of evaluating the 
merits of the proposal approved by PJM's Board, the NOPR terminates the 
PJM docket and directs PJM and its stakeholders to focus on whether 
demand response resources should be paid the market price--a question 
that has undoubtedly been analyzed, addressed and debated at numerous 
stakeholder meetings.
---------------------------------------------------------------------------

    \10\ PJM Industrial Customer Coalition v. PJM Interconnection, 
L.L.C., 121 FERC ] 61,315, at P 29 (2007) (Wellinghoff and Kelly, 
Comm'rs, dissenting).
    \11\ PJM did note that the concept of paying LMP-G received 
considerable support and ``conservatively could be said to have 
garnered at least a three-quarters majority approval.'' See PJM 
Supplemental Report in Docket No. EL09-68-000 at 24-25.
---------------------------------------------------------------------------

    Since today's NOPR does not sufficiently explain the need for a 
uniform compensation approach, I am troubled by the decision to 
terminate PJM's individual proceeding. If approved, PJM's efforts 
toward developing a compromise solution for its market would have 
likely resulted in additional demand response participation and its 
associated benefits. However, with this NOPR's issuance, PJM and the 
other RTOs must now refrain from making changes to its demand response 
compensation rules pending the outcome of the rulemaking proceeding. 
The NOPR may also discourage some emerging organized markets from 
continuing to evolve toward the LMP model, as well as discourage some 
non-organized regions from seriously considering moving toward a market 
structure.
    Ultimately, I want demand response to thrive and succeed in all the 
energy markets.\12\ However, there are only so many policy decisions 
and rulemakings that this Commission can make to encourage its 
development. As mentioned in the preamble, the primary barrier to 
increased demand response is the disconnect between retail and 
wholesale prices and the remedy resides at the retail level where there 
is a lack of dynamic pricing. The approach embraced in the NOPR may 
also lead to a situation where residential ratepayers could be 
subsidizing other classes of service while unable to participate 
themselves in demand response

[[Page 15371]]

programs. Absent attention to these issues, it will be difficult for 
any proposal to place generation and demand response on a precisely 
level playing field.
---------------------------------------------------------------------------

    \12\ My concern here goes to highlight the differences between 
regions with competitive wholesale markets and those that consist of 
largely bilateral market structures. By imposing a uniform 
compensation requirement, this proposed rulemaking could further 
exacerbate bifurcated approach toward national policy: entities in a 
competitive wholesale market must comply with increasingly 
burdensome requirements while entities operating in bilateral 
markets are often free from requirements that otherwise advance 
national policy goals.
---------------------------------------------------------------------------

    Until then, this Commission must review what options it has 
available without resorting to policies that would adversely enable the 
short-term development of demand response at the expense of its longer-
term success. In closing, I believe that demand response programs have 
great potential to enhance the organized energy markets and I look 
forward to their continued development. I am concerned, however, that a 
one-size-fits-all approach could result in uneconomic outcomes that 
ultimately set back the future development of demand response.

Philip D. Moeller,
Commissioner.
[FR Doc. 2010-6478 Filed 3-26-10; 8:45 am]
BILLING CODE 6717-01-P

