On January 31, 2011, the Federal Energy Regulatory Commission (the “Commission” or “FERC”) issued an order (the “Order”) approving modifications to PJM Interconnection, L.L.C.’s (“PJM’s”) Open Access Transmission Tariff (the “Tariff”) and Reliability Assurance Agreement (the “RAA”) that revise PJM’s capacity market model (Reliability Pricing Model (“RPM”)) rules. The modified Tariff and RAA (collectively, the “Modified RPM Rules”), which became effective on February 1, 2011, create the following two additional demand response products for demand resources that participate in RPM: an annual product for demand resources that will be available for interruption throughout the entire year for a defined number of hours within a defined time window (“Annual Demand Resource”) and an extended summer product for demand resources that will be available for interruption from May through October during most hours of the day (“Extended Summer Demand Resource”). Demand response providers with demand resources that qualify for the two additional products may submit offers for those resources at the May 2011 RPM auction for the delivery year 2014 through 2015.

Additional Demand Response Products

Under RPM, PJM conducts forward auctions to secure capacity for a future delivery year. Capacity represents the need to have adequate generation and demand resources available to meet the demand for electricity. PJM requires its members that are load serving entities to procure the capacity resources to meet their consumers’ electricity demand plus a reserve amount. Existing and proposed generation facilities, demand response resources (i.e., a resource, such as a manufacturing plant, with a demonstrated capability to provide a reduction in demand or otherwise control load), and energy efficiency resources (i.e., projects that involve the installation of more efficient equipment, such as efficient lighting, appliance, air conditioning installations, building insulation or the implementation of more efficient processes) can offer their resources into the RPM auction as capacity resources in order to meet PJM’s capacity requirements.

Prior to the effective date of the new products, demand resources could participate in RPM only if they: (1) could be interrupted during the hours of 12:00 p.m. to 8:00 p.m. (Eastern Prevailing Time) on non-Holiday weekdays during the 8-hour daily peak window for the appropriate season; (2) could be called upon for interruptions up to ten times during that period each year; and (3) could remain interrupted for up to six hours when called upon (under the Modified RPM Rules, this product is still available during the months of June through September and has been designated as Limited Demand Resource). However, due to the tremendous growth in the level of demand resources participating in RPM, the limited availability of demand resources to respond to emergency events, and significant load growth, PJM proposed adding two additional demand response products (Annual Demand Resource and Extended Summer Demand Resource) in order to increase the resources available to PJM to manage the bulk electric system.

Under the Modified RPM Rules, an Annual Demand Resource is required to be available on any day of the year, for an unlimited number of interruptions during the year, and for an interruption of up to ten hours. However, Annual Demand Resources must be available to be interrupted by PJM only from 10:00 a.m. to 10:00 p.m. during the months of May through October and from 6:00 a.m. to 9:00 p.m. during the months of November through April. Finally, Annual Demand Resources are permitted maintenance outages that are approved in advance by PJM for any underlying equipment.

Extended Summer Demand resources are required to be available on any day from May through October. Furthermore, such resources must be available for interruption from 10:00 a.m. to 10:00 p.m. and the maximum duration of interruption is ten hours.

Because there are now three demand resource products under the Modified RPM Rules, demand response providers must specify whether they are offering their demand resource as a Limited Demand Resource, Annual Demand Resource, or an Extended Summer Demand Resource. Alternatively, demand response providers with demand resources that can qualify as either a Limited Demand Resource, Annual Demand Resource, or Extended Summer Demand Resource may submit linked alternative offers for their resource. Under the alternative approach, the seller must include a price difference of a least one cent per MW-day between the alternative offers. The algorithm used to clear the auction clearing will select the offer that yields the least-cost solution.

PJM members argued before FERC that PJM’s proposal failed to explain how the two new products would be dispatched in the energy market relative to the existing product, so that demand response providers can decide which product to offer. In response to these concerns and as a condition of its approval, FERC ordered PJM to make a compliance filing within 30 days explaining the dispatch mechanism for the three products.

Implications of the Modified RPM Rules

In the Order, FERC stated that Extended Summer Demand Resources should receive higher prices than Limited Demand Resources because they will be available for curtailment more often. Moreover, Annual Demand Resources should clear the auction at a higher price than both Extended Summer Demand Resources and Limited Demand Resources for the same reason. Therefore, as a result of the Modified RPM Rules, existing demand response providers that have the increased availability to offer their demand resources into RPM as either an Annual Demand Resource or Extended Summer Demand Resource should be able to increase the revenue received from their demand resources and potential demand providers will have an increased incentive to participate in the programs because the two additional demand response products should clear at higher prices than the existing demand response product.