Navigant Research Blog

Waiting for the Supreme Court’s Call

Brett Feldman — April 28, 2015

Many are waiting for the Supreme Court to decide whether it will take up the case on the Federal Energy Regulatory Commission’s (FERC’s) Order 745 on demand response (DR) compensation, possibly by the end of April. I thought it would be worthwhile to take a look at the contingency or stop-gap plans that some of the affected regional transmission organizations (RTOs) are contemplating, particularly for the capacity markets where the vast majority of DR participation takes place. PJM started the process several months ago; the New York Independent System Operator (NYISO) began a couple months ago; and the Independent System Operator of New England (ISO-NE) just released its proposal last week. All of them start from similar basics, but there are differing details that may affect the effectiveness of each one.

PJM: Laying the Groundwork

PJM laid the groundwork first and came up with a straightforward proposal whereby the DR would be moved to the demand side of the reliability pricing model (RPM) capacity market. The load-serving entity (LSE), which provides the retail electricity supply to customers (either a utility or a competitive supplier), would reflect the DR in its demand bid. This would lower the total demand in the market, leading to the same price effect as if the DR had bid into the supply stack.

Integration of DR Bids with RPM Demand Curve

(Source: PJM Interconnection)

In theory, this approach gets around the FERC jurisdictional issue in the court case because it would be retail entities bringing the DR to the market instead of direct wholesale market participation. The concern from DR providers is that this structure adds an extra layer of administration between the customer and the market, since the DR providers wouldn’t be able to bid in directly (unless they were an LSE) and they would have to work through the LSEs. That relationship may necessitate extra legal documentation. Plus, some LSEs may not be motivated to encourage DR and could bog it down, leading to a reduction in the amount of DR in the marketplace. PJM even submitted this proposal to the FERC to be proactive and have it in place should the court force its hand, but the FERC ruled that it was premature instead of proactive and should not be formally introduced until the court verdict is clear.

NYISO Twist

NYISO basically used the PJM proposal as a starting point and built upon it. After getting feedback from market participants about the drawbacks of the PJM structure, NYISO added a twist in which the LSE is basically just a pass-through mechanism for the DR to reach the market, while the DR providers are still the contracting agents that register the customers with the NYISO. This adjustment eases some of the perceived constraints from the PJM model, but there are still a lot of details that need to be worked out in terms of bidding and how DR providers can continue to participate in the NYISO stakeholder process.

ISO-NE Approach

ISO-NE had been pretty quiet on the matter until April 17, when it released its contingency plan. It took a different path than NYISO to try to address some of the shortcomings of the PJM approach. It still relies on the LSE to administer the DR, but it purports to provide more incentive to the LSEs to do so by changing the cost allocation methodology for capacity costs from a fixed charge to a performance charge reflecting the actual consumption of customers during scarcity conditions. LSEs consuming less than their allocated share of capacity would see their charge go down; the converse is true for those consuming more. In theory, this model incentivizes LSEs to reduce their load during these times; reality could prove otherwise if none of the large LSEs feel the risk outweighs the potential benefits.

There you have three different approaches to address the same issue. Perhaps none of them will be necessary if the Supreme Court ultimately vacates the lower court’s ruling, but in the meantime, many smart people have spent many hours getting ready for the worst-case scenario.

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