By Daniel Scripps

Affirming its basis for issuing Order 745, “Demand Response Compensation in Organized Wholesale Energy Markets,” the Federal Energy Regulatory Commission (FERC) on December 15, 2011 issued Order 745-A (PDF), denying petitions for rehearing of the original Order, and making only minor clarifications to the requirements of Order 745. As was the case in the original Order, FERC Commissioner Philip Moeller dissented from Order 745-A.

The FERC issued Order 745 (PDF) on March 15, requiring ISOs and RTOs to pay demand response resources the locational marginal price (LMP) for energy so long as the demand response resource has the capability to balance supply and demand as an alternative to a generation resource and dispatch of the demand resource serves as a cost-effective alternative to a generation resource as determined by a net benefits test. (A full description of Order 745 can be found here.) Under Order 745, ISOs and RTOs were required to submit filings demonstrating their compliance with the Order by July 22, 2011, including their plans to carry out a net benefits test each month to establish a threshold price where demand response resources are deemed to be cost-effective.

As noted in an earlier Clean Energy Law Report post on this topic, following the issuance of Order 745, a group of industry trade organizations sought rehearing (PDF), arguing that the FERC had found in its 2010 Order in EnergyConnect, Inc. that demand response is a retail non-purchase of energy, and rate setting for retail services is not within the FERC’s jurisdiction under the Federal Power Act (FPA). In Order 745-A, the FERC reiterated its jurisdictional prerogatives, stating that the participation of demand response resources in the wholesale market serves to lower wholesale rates overall, mitigate the market power of generation resources, and strengthen system reliability, and that such a decision was consistent with its determination in EnergyConnect that the Commission retained jurisdiction under the FPA to regulate those elements of demand response which affect rates in organized wholesale electric markets. Further, the FERC argued that its jurisdictional analysis “is consistent with precedent in which the courts have found that the Commission has jurisdiction over aspects of RTO services that affect wholesale rates.”

Finally, in regards to the appropriate level of payment for demand response resources, the Commission adopted the same market efficiency argument to support its use of LMP as the compensation level: “…a power system must be operated so that there is real-time balance of generation and load, supply and demand. When balancing supply and demand, an RTO or ISO therefore can rely on the dispatch of a generation resource to increase supply or a demand response resource to decrease demand.” While FERC acknowledged that “there continue to be diverging opinions, including among noted experts, regarding the appropriate level of compensation for demand response resources participating in the organized wholesale energy markets,” FERC relied on the ability of demand response to balance supply and demand as its justification for incorporating LMP as the appropriate payment level.

As he did in Order 745, Commission Moeller dissented from the denial of rehearing, stating that “rather than impose a nationwide approach to demand response compensation, the Commission’s objective of promoting demand response would have been better served if the regions were free to propose compensation methods that recognize the very real differences in the structures of the regional markets.” He also restated his earlier concerns that payment of the full LMP for demand response would result in double payment as demand response resources would not only get LMP, they would also be spared the cost of energy consumption they otherwise would have incurred. As noted above, a majority of the Commission disagreed, finding that LMP was the appropriate compensation level as long as the demand response resource met the net benefits test detailed in Order 745.