Energy Legal Blog

Better Markets Through Demand Response, Forward Contracting and Accountability

FERC issued a final rule October 17 to strengthen competition in organized wholesale electric markets.  The rule (generally consistent with the proposed rule FERC issued last February) seeks to improve wholesale markets by establishing a more forceful role for demand response and long-term contracts in organized markets, strengthening market monitoring, and improving the responsiveness of regional transmission organizations' (RTO) and independent system operators' (ISO) to their customers. 

• As to demand response, FERC directs each RTO/ISO to:  accept bids for ancillary services from demand response resources; eliminate charges to buyers for voluntarily reducing demand during emergencies; permit market participants to aggregate retail demand responses (unless otherwise prohibited by state law); and allow market prices to reflect more accurately the value of energy during shortages, by adopting scarcity pricing to allow prices to rise during times of shortages and encourage an increase in supply.  FERC also requires the RTOs/ISOs to assess and report on any remaining barriers to comparable treatment of demand response resources.  Commissioner Suedeen Kelly dissented from the Commission's scarcity pricing decision, arguing her belief that before allowing scarcity pricing, FERC should ensure that the necessary generation and demand response infrastructure are in place to give consumers the ability to respond to higher prices.

• Because long-term contracts help market participants hedge against potential volatility in market prices and can help improve price stability, FERC urges more long-term contracting in organized markets.  Finding there is no fundamental barrier to long-term contracts in organized markets, FERC sought to improve transparency in such contracting by requiring RTOs/ISOs to dedicate a portion of their websites to a transparent exchange of long-term sale offers and buy bids.

• To enhance the effectiveness of RTO/ISO market monitoring, the rule addresses  the independence and functioning of RTO/ISO market monitoring units and information sharing.  In apparent response to some of the difficulties faced by the PJM Interconnection and its market monitor last year, the final rule requires that market monitors report directly to RTO/ISO boards, as opposed to management.  FERC also broadened market monitors' reporting duties by clarifying that market monitors must refer to FERC any instances of misconduct by the RTO or ISO, as well as by market participants, and by expanding market monitors' referral obligations to include perceived market design flaws.

• Finally, FERC sought to improve RTO/ISO responsiveness by requiring that they provide customers and other stakeholders with some form of direct access to their boards.  FERC emphasized the importance of RTO/ISO boards being willingness to directly receive concerns and recommendations from customers and other stakeholders, and to consider fully and take action in response to such concerns and recommendations.

These reforms come on the heels of a report by the Government Accountability Office (GAO), issued last month, that questioned how well FERC has quantified the benefits of RTOs to electric consumers.  Although not a direct response to the GAO report, the new rule appears aimed at some of the problems that have typically been identified with organized markets.