How can Demand Response (DR) resources be compensated at the retail level in light of the D.C. Circuit Ruling on FERC Order No. 745?

shutterstock_64255963On a January 21, 2015, former Federal Energy Regulatory Commission (FERC) Chair Jon Wellinghoff participated in a webinar produced by the Advanced Energy Economy entitled Order 745 and the Future of Demand Response: An Interview with former FERC Chairman Jon Wellinghoff.  During the webinar, Mr. Wellinghoff discussed the D.C. Circuit’s ruling on FERC authority with regards to demand response (DR) under Order 745 (Electric Power Supply Association v. FERC, 753 F.3d 216 (D.C Cir. May 23, 2014)).    Order 745 created market based demand response compensation for DR resources by requiring electric utility and retail market operators to pay the market price or locational market price (LMP) when load reductions contribute to balancing supply and demand avoiding the need for additional generation.  The D.C. Circuit found that Order 745 directly regulates the retail market and that the Federal Power Act unambiguously restricts the FERC from “directly regulating a matter subject to state control, such as the retail market.” (Electric Power Supply Ass’n, 753 F.3d 216, 222-224).  The court held that the FERC consequently exceeded its statutory authority in promulgating Order 745 requiring compensation for DR resources in wholesale bulk energy markets.  This decision is being appealed to the U.S. Supreme Court and is currently stayed.

Mr. Wellinghoff and Jon Tong proposed the creation of an independent distributed system operator (IDSO) to help the retail distribution system manage distributed generation resources (DER) such as DR with a market based approach (Public Utilities Fortnightly, August 2014, p. 19).  During the webinar, Mr. Wellinghoff again advocated for the creation of IDSOs to help manage these resources at the distribution level, which brought to mind interesting questions:  First, how can DR resources be compensated at the retail distribution level to ensure that DR resources and other DERs are correctly and cost effectively procured, used, and valued? Second, what will be the major driver for DR at the retail distribution level?

These questions are premised on the need to compensate DR resources for services rendered to the grid and the fact that there is nothing comparable to wholesale transmission markets such as PJM driving the creation of DR resources.  If the U.S. Supreme Court does not hear the case or upholds the Electric Power Supply Association decision, aggregated DR resources that provide services at the wholesale transmission level cannot receive compensation within existing wholesale markets.   This could leave retail distribution as the likely place for a compensation mechanism for DR resources.  Compensation for DR can be achieved through several paths at the distribution level, including creating a DR compensation tariff, mandating procurement of DR through existing integrated procurement processes, or through systemic changes such as creating a distribution level market under an IDSO.

In California, tariffs serve as the most defined mechanism for compensation under current California Public Utilities Commission (CPUC) authority.  The CPUC can act through its rule making process to create a mechanism for investor owned utilities (IOUs) to compensation DR resources for services to the IOU.  However, it remains unclear whether tariffs are a sufficient tool to effectively incorporate DERs into the distribution system and then into the wholesale system.  The CPUC can also mandate that IOUs procure specified amounts of DR as a preferred resource under California’s Loading Order through their long-term procurement processes.  Southern California Edison’s recent Long-Term Procurement for Local Capacity process to replace capacity lost from the retirement of the San Onofre Nuclear Operations Station (CPUC D. 14-03-004) represents this type of process and allowed the IOU to procure preferred and non-preferred resources under a request for proposal (RFP) process.  Finally, the California Legislature could pass a bill authorizing the CPUC to create a market or IDSO to expand, integrate, and optimize DERs such as DR.  The CPUC has little to no experience creating and regulating markets making it unclear whether this mechanism is viable.

The need to accurately and fairly compensate resources that provide services at the distribution and transmission levels grows with the interconnection of more distributed energy resources, increasing participation in the electric market by retail customers, the ongoing debate over how utilities and the grid should operate, and the decarbonization of the grid under the U.S. EPA’s proposed Clean Power Plant Rule and California’s Cap and Trade program.  If resources like DR cannot receive compensation at the transmission level than a mechanism at the distribution level could be an option to provide compensation for the services that they provide.

The need for such a mechanism at the distribution level becomes clearer if the D.C. Circuits’ ruling stands.

Note: Jon Wellinghoff and Lorenzo Kristov (CA ISO) spoke about the distribution system operator concept at the 6th Annual Climate and Energy Law Symposium in November 2014. To see the webcast of these talks, see the USD School of Law’s webpage. Mr. Wellinghoff participated in the morning keynote panel. Mr. Kristov was the third speaker on the first panel.

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About Joe Kaatz

Staff Attorney at the Energy Policy Initiatives Center, University of San Diego School of Law.
This entry was posted in Energy, Litigation and tagged , , , , , , , . Bookmark the permalink.

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