The Federal Energy Regulatory Commission issued its final rule addressing compensation for demand response in Regional Transmission Organization ("RTO") and Independent System Operator ("ISO") organized wholesale energy markets. "Demand response" means reduced consumption of electric energy by customers from their expected consumption in response to an increase in the price of energy. FERC Chairman Jon Wellinghoff has promoted demand response as a means to create more efficient wholesale energy markets and "reduce the need for putting in very expensive, polluting, peaking generation units." See, e.g., "Resolved: Using Nuclear and Coal Power in an Environmentally Friendly Manner Is the Path Forward in Controlling Climate Change," The Environmental Forum, Vol. 27, No. 1 at 50 (Jan/Feb 2010).
Because wholesale energy markets originally were designed to compensate energy production rather than energy reduction, FERC's challenge was to figure out how to properly compensate parties willing to reduce consumption. Under the new rule, demand response resources will be paid the same locational marginal price ("LMP") that RTOs and ISOs pay for generation, but only if their energy reductions result in a net benefit—i.e., the reduced LMP resulting from dispatching the demand response resource exceeds the cost of paying LMP to that resource. Accordingly, the rule directs RTOs and ISOs to develop a mechanism to determine the price level at which the dispatch of demand response resources will be cost-effective. The price threshold must be based on historical data and updated monthly.
The new rule is FERC's most comprehensive effort to date to effectuate the Energy Policy Act of 2005's mandate to eliminate unnecessary barriers to demand response participation in the organized markets. However, the new rule is opposed by some in the electric industry. A variety of groups have filed petitions with FERC seeking rehearing of the final rule.