Under Federal Energy Regulatory Commission (FERC) Order 745 considering Demand Response Compensation in Organized Wholesale Energy Markets, new requirements governing payment for demand response resources must soon be implemented by Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs).  As previously discussed in our Clean Energy Law Report, pursuant to Order 745 issued on March 15, 2011, ISOs and RTOs are required to implement a Net Benefits Test in order to assess the threshold point at which demand response resources become cost-effective.  RTOs and ISOs are now preparing to submit compliance filings on July 22, 2011, that contain their analyses and accompanying tariff changes to respond to FERC’s directives.  Stakeholder proposals indicate that RTOs and ISOs will pursue diverse approaches to compliance with Order 745.  It appears that some likely will argue that their existing tariff rules already comply, while others are preparing significant new tariff schemes (albeit, with initial stakeholder proposals showing many issues unresolved).  At the same time, a diverse group of industry trade associations have mounted a fundamental legal challenge to FERC’s jurisdiction under the Federal Power Act (FPA) over demand response compensation. 

Specifically, RTOs and ISOs must carry out a Net Benefits Test each month according to specifications described in the final rule, thus establishing a monthly threshold price at which demand response compensation is triggered.  As part of its July 22 compliance filing, each RTO and ISO must explain how its existing Measurement and Verification protocols for demand response will continue to ensure accurate baseline calculations and propose modifications if necessary.  In addition, each RTO and ISO must demonstrate that it is either currently using, or else planning to implement, a cost allocation methodology that apportions the costs associated with demand response proportionally to all entities that benefit from lower locational marginal prices (LMPs) resulting from the dispatch of demand response resources.         

Stakeholder materials indicate that for some RTOs and ISOs, many questions remain as they formulate their compliance proposals.  For example, the compliance proposal being developed by PJM Interconnection (PJM) outlines conditions under which demand response will be dispatched, but leaves open many issues, such as whether or not it should require submitted offer prices to exceed the established net benefits threshold.  PJM is currently soliciting feedback, and has submitted a solution matrix for stakeholder review.  California ISO (CAISO) is further along in the process, and has issued its final net benefits test proposal, which was released weeks after its Market Surveillance Committee issued a strongly-worded critique of Order 745.

PJM’s initial monthly threshold calculations find LMPs for demand response of between $30 - $40 per MWh.  PJM’s calculations for periods in 2008 when gas prices were high would yield LMPs between $45 and $60 per MWh.  CAISO’s net benefits test yields higher LMPs—producing a price of $57 per MWh for off-peak hours in July 2011 and typical threshold prices of between $45 and $60 per MWh.

Many RTOs and ISOs are advancing the argument that demand response programs under their existing tariffs already fulfill many of the requirements set forth in Order 745.  For example, New York ISO plans to implement Order 745 while preserving many of the central features of its Day-Ahead Demand Response Program.  As detailed in a letter to FERC, CAISO plans to proceed assuming that its default load adjustment mechanism may be left unchanged unless FERC responds to its pending request for clarification of Order 745.

Other ISOs intend to institute significant modifications.  ISO New England (ISO-NE) plans to carry out two types of market rule changes.  ISO NE will “consolidate and modify existing price-response programs to comply with the Commission’s Final Rule,” as well as implement new market rules to “fully integrate demand response into energy markets and system infrastructure.”  ISO NE has urged FERC to deny any requests for rehearing of Order 745, arguing that a rehearing would disrupt current efforts by RTOs, ISOs, and stakeholders to comply with the Order.

At this time, the methodologies for calculating accurate baseline thresholds for triggering demand response compensation, as well as adoption of sufficient Measurement & Verification protocols remain controversial among stakeholder groups within several RTOs / ISOs.  In addition, it appears likely that there will be little uniformity among the ISOs / RTOs in the approach taken to comply with Order 745. 

While RTOs and ISOs prepare to comply with Order 745, a diverse ad hoc group of industry trade groups has issued a joint rehearing request arguing that FERC exceeded its jurisdictional authority in issuing Order 745.  The parties to this rehearing request, the Electric Power Supply Association, American Public Power Association, Electric Power Generation Association, and the National Rural Electric Cooperative Association assert that FERC lacks authority to set demand response compensation rates under the FPA because the act does not give the Commission jurisdiction over retail non-purchases.  In Order 745, FERC contended that it may regulate demand response compensation because compensation rates affect the wholesale price of electricity, which is subject to its exclusive jurisdiction.  The joint rehearing request challenges this contention, arguing that “[t]here is an insufficient nexus between demand response compensation practices and jurisdictional rates to justify an exercise of the Commission’s ‘affecting’ jurisdiction.”

Nevertheless, ISOs and RTOs must continue to comply with Order 745 and be prepared to make compliance filings on or before July 22.