Recent FERC Enforcement Actions and New Proposed Market Rules Are Changing the Landscape for Demand Response Resources

Since the Federal Energy Regulatory Commission ("FERC") ruled in 2011 that ISOs and RTOs generally must pay demand response resources the full wholesale price as generation resources, the organized markets are experiencing a dramatic increase in demand response services. Recent enforcement action by the FERC and proposed rule changes in the organized electricity markets show that the FERC and the markets are paying attention. New proposed disclosure requirements, proposed information requirements on the nature of particular demand response services, and the FERC's civil penalty authority to assess $1 million per day, per violation, mean that investors and demand response resources must pay attention too.

The FERC defines "demand response" as "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 lower consumption of electric energy." Grid operators—Independent System Operators ("ISOs"), Regional Transmission Organizations ("RTOs"), or utilities—and other entities use demand response programs to curtail or shift loads instead of building more generation. In recent enforcement actions, the FERC investigated and penalized demand response service providers for not ensuring that load actually could be curtailed or shifted. 

For example, the FERC investigated Enerwise Global Technologies, Inc. ("Enerwise") for registering a customer for a load reduction amount that Enerwise knew could not be achieved reliably, then instructing the customer to artificially increase load prior to a baseline test. In a settlement with the FERC in June 2013, Enerwise agreed to pay $780,000 in civil penalties, disgorge $20,726 plus interest, invest $500,000 in technology improvements, and submit to compliance monitoring. In another enforcement action, the FERC investigated a demand response resource for submitting inaccurate metering information that the FERC found revealed a lack of due diligence and violated PJM Interconnection, Inc.'s tariff. In a settlement with the FERC in December 2012, that company agreed to pay $820,000 in civil penalties, disgorge $656,806 plus interest, develop a compliance plan, and submit to compliance monitoring.

In addition to enforcement actions, the FERC and the organized markets are creating more stringent standards for measuring and verifying demand response resources. For example, PJM now requires demand response providers to submit specific and comprehensive information about their services at least 15 business days before every auction. These "demand response sell offer plans" include:

  • Identities of existing demand response resources;

  • Details of, and key assumptions underlying, planned demand resource quantities;

  • An officer certification that the information is true and correct and that the provider reasonably expects to physically deliver the amount offered; and

  • Customer site-specific information in high-risk areas—when (i) the transmission zone has aggregate cleared offers from the last auction that exceed actual or expected demand response and (ii) the demand response provider is offering demand reductions that exceed that provider's highest previous levels.

The FERC held a technical conference on PJM's proposal to consider, among other issues, evidence that demand response in zones with high demand response penetration are less likely to perform than in other zones. Opponents argued at the conference that PJM's assertions regarding high-risk areas were unsupported by evidence and that the requirements were unduly burdensome. In February 2014, the FERC approved the proposal, finding that "as penetration levels increase, a closer examination of additional demand response offers may be warranted" and that the revisions will "help ensure that demand response continues to be a valuable resource." These changes will increase costs for participants in PJM's demand response programs and elsewhere as these heightened standards are adopted by other ISOs and RTOs.

The FERC also recently amended its regulations to incorporate by reference updated business practice standards adopted by the Wholesale Electric Quadrant of the North American Energy Standards Board ("NAESB") to support the measurement and verification of demand response and energy efficiency products and services for ISOs and RTOs. The standards provide common definitions and processes for demand response products, while leaving each ISO and RTO flexibility to select from among methods identified. Industrial customers argue that the standards would hurt their efforts to participate in the market for demand response. But the FERC indicates that these concerns are outweighed by the new standards' benefits, which include transaction cost reductions, increased market participation, harmonized regional performance evaluations, and improvements in measuring demand response resources' performance. 

The Government Accountability Office ("GAO") recently issued a report praising the federal government's efforts to facilitate demand response activities, including the FERC's approval of ISO and RTO demand response programs, and adopting the NAESB standards to assist in quantifying demand response resources. At the same time, the GAO criticized the FERC's data collection and reporting efforts involved in its annual reports on demand response, finding that the FERC should reevaluate the scope of reporting and should document any adjustments it makes to data to improve consistency to comply with best practices.

As standards for measuring and verifying demand response heighten, activities that qualify for demand response programs may be expanding, as in the case of behind-the-meter generation. The FERC recently granted a complaint against New York Independent Service Operator, Inc. ("NYISO"), finding it discriminated by excluding behind-the-meter generation from one of its demand response programs. The FERC found "from the perspective of the transmission grid, demand response produces a load reduction in the wholesale market from a validly established baseline, whether the demand response involves only curtailment of load or is facilitated by the use of behind-the-meter generation." A separate dissenting statement was issued, emphasizing that NYISO has little control over such generation, that it is not subject to the metering and reporting requirements of the program, that there are opportunities to game the system, and that there were environmental concerns with older diesel-fired back-up generation. The FERC granted a request for rehearing in January 2014.