Demand response resources, which earn a return for their owners by consuming less electricity, have secured a place in U.S. wholesale power markets, but with that comes increased enforcement scrutiny.

Demand response programs were developed by utilities as mechanisms to maintain reliable service by curtailing certain loads during critical shortage periods. In the 1980’s and 1990’s, these programs evolved, and the focus shifted to conservation and energy efficiency. Local utilities and state regulators developed programs that enabled customers to receive credits for interrupting high-usage devices like air conditioners on certain peak days. Utilities also developed programs to provide financial incentives for customers to utilize energy efficient appliances and building materials.

In 2011, the Federal Energy Regulatory Commission (FERC), frustrated in part by what it saw as a slow and inconsistent expansion of demand response programs, issued an order that required regional wholesale electricity market operators to compensate qualifying demand response resources on the same basis as supply resources.1 In other words, if a demand-response resource was capable of reducing demand by 1 MW-hour per hour, it would be compensated at the same level as a generator capable of producing 1 MW-hour of energy per hour.

Seizing this opportunity, aggregators entered into contracts with many smaller customers in order to offer larger and more robust demand resources. Some large industrial and commercial enterprises also agreed to reduce production in order to take advantage of demand resource compensation opportunities.

This new regime was thrown into turmoil when a federal appellate court overturned FERC’s order, finding that it improperly infringed on responsibilities reserved for the states. However, the Supreme Court has now upheld FERC’s authority to mandate that demand response resources be compensated on a comparable level with generation resources.2 The path is cleared for demand resources to take an even larger and more active role in wholesale electricity markets.

With this expansion of opportunity for demand resources comes risk. FERC has expanded the role of its Office of Enforcement, and that Office is taking a hard look at whether demand resource owners and aggregators have sought compensation for demand response they are not able to provide.

Most demand response programs require that participating resources demonstrate how much demand they can reduce at the direction of the regional market operators. FERC has brought penalty actions against demand resources where it appears they gamed these demonstrations by inflating the baseline use of electricity before reducing demand. In 2013, FERC settled one such case against a paper mill, fining the mill US$10 million and requiring repayments of approximately US$2.8 million. The energy services company and its president who assisted the paper mill3 were assessed penalties of US$5.65 million and were ordered to repay approximately US$167,000 in allegedly unlawful payments. They did not settle and are challenging FERC’s penalty assessment in court. Different strategies for gaming the demand response market seem likely to emerge, and the enforcement cases will just as surely follow.