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PJM to offer ‘stop gap’ demand-response fixes by year’s end

By: Rod Kuckro |

The PJM Interconnection, manager of the nation’s largest wholesale electricity market, told regulators Wednesday that it plans to submit changes to the rules under which it operates to allow it to continue using demand-response programs in the wake of an adverse ruling by a federal appeals court.

The changes, if approved by the Federal Energy Regulatory Commission, might enable PJM and other regional electricity markets to continue using demand response — effectively the voluntary conservation of electricity by large customers in exchange for payments — while the issue makes its way through a potential review by the U.S. Supreme Court.

On May 23, the U.S. Court of Appeals for the District of Columbia Circuit scrapped the FERC rule that provided incentives for electricity users to consume less power through demand response.

The D.C. Circuit, in Electric Power Supply Association v. FERC, held that FERC had overstepped its authority under the Federal Power Act in going beyond its jurisdiction of regulating wholesale markets. The ruling was welcomed by industry groups — notably the Electric Power Supply Association and Edison Electric Institute — that for years have argued that FERC’s Order 745 on demand response usurps states’ exclusive authority to regulate retail electricity markets.

But the ruling, and a subsequent back-and-forth at FERC over an aggressive request by FirstEnergy Corp. to get PJM out of the demand-response business once and for all, has exposed the antipathy that many companies owning power plants have to the customer-driven trend to use less of their product. While consumer advocates, state regulators and large customers are opposing FirstEnergy at FERC, generators such as PPL Corp. and Public Service Enterprise Group are squarely behind FirstEnergy.

The PJM Interconnection, which serves 61 million people in 13 Mid-Atlantic and Midwestern states and the District of Columbia, treats the megawatts saved through demand response just as if they were megawatts produced by a power plant.

Demand-response resources play an especially important role in PJM’s annual auctions to ensure adequate electricity supply three years out. The May 2014 auction saw nearly 11,000 megawatts successfully bid into and “clear” the auction, displacing just as much steel-in-the-ground generation from power plants. Plants or demand-response resources that cleared are eligible for payments in exchange for being available in 2017/2018.

Akron, Ohio-based FirstEnergy is one of the nation’s largest investor-owned electric utilities, with 10 regulated distribution companies operating in the Mid-Atlantic and Midwest. It also has nearly 18,000 MW of generating capacity, nearly all of it in the PJM market.

The same day the D.C. Circuit ruled, FirstEnergy asked FERC to void the auction results for 2017/2018 earlier that month “because the inclusion of demand response in the auction parameters was unlawful” and to remove any language in PJM’s rules that treats and compensates demand response as a capacity supplier.

The bold move by FirstEnergy prompted a record turnout by stakeholders for a PJM conference call earlier this month and the PJM filing Wednesday.

In its Wednesday filing, PJM said it expects to ask FERC “by the end of 2014 or shortly thereafter” to approve a number of fixes to its rules, or tariff, “to serve at least as a ‘stop gap measure,’ perhaps to be effective only until such time as the commission and industry stakeholders have had an opportunity, once jurisdictional questions are finally resolved, to consider and develop generic and more considered options for demand-response participation in organized wholesale electricity markets.”

How do you use demand response?

Demand response is the more fashionable name for the practice used for decades by electric companies to manage their supply during periods of high demand, such as during temperature extremes or when a power line goes down. Those occasions were few and far between by comparison to how demand response — enabled by technology — has evolved into a serious daily tool in electricity markets that prevents the construction of power plants and more expensive existing plants from being called upon.

“There’s a place for demand response; it’s going to continue to be a tool for grid operators, especially during these periods of high demand,” said FirstEnergy spokesman Doug Colafella. A regional power market like PJM “can still order demand response when the system conditions call for it from customers and utilities.”

“But it doesn’t mean it has a place in wholesale power markets,” he said. It is “really a state jurisdictional retail product; states can establish a retail tariff and sign up as much demand response as they deem appropriate.”

During the May PJM auction, large nuclear and coal plants owned by FirstEnergy and others did not “clear,” knocked out by 10,975 MW of demand response.

Colafella asserts that if PJM takes out the demand response and reruns the auction, “you’re going to see that 11,000 MW of other baseload generation clear the auction and thus be compensated.”

PJM General Counsel Vincent Duane understands “where FirstEnergy is coming from,” he said in an interview. “They have a mission and an obligation to their shareholders; they have a business to run.”

But demand response “plays an important part in helping us discharge our mission — delivering competitively priced power at a wholesale level and making sure it’s available on demand to customers.”

As for FirstEnergy’s position, “I think they’re looking at it in a very traditional perspective,” Duane said. “They’re looking at it through the eyes of an engineer who is comforted by knowing that there is a resource at his or her fingertips that he can turn on or off — and demand response doesn’t fit that profile.”

Role for states

On Monday, the D.C. Circuit told FERC it would forgo issuing a mandate on its ruling until the federal government decides whether it will seek review by the Supreme Court. The government has until Dec. 16 to file. The court would not normally rule on such requests until the spring, and if denied, PJM said it could create “chaos” on the eve of the next capacity auction in May.

If the D.C. Circuit decision stands and FERC’s demand-response regime is voided, it will be up to states, working with regional grid operators, to devise alternative programs.

“It would be great if the states actually do pursue demand response,” Calpine Corp. CEO Thad Hill said at a PJM-sponsored event in Washington on Tuesday. But “they would obviously have to coordinate very closely with PJM in the market structure; it would be something that’s very hard for the states to do without coordinating with PJM,” he said.

Edison International CEO Theodore Craver, speaking at the same event, was not keen on turning demand response over to the states. “If that happens, you’ll end up with a lot of different flavors, and it will be uncoordinated and it will just add to the sloppiness that we already see in the markets. Overall, it’s not a big help from the standpoint of providing reasonable, orderly signals to participants,” he said.

FERC Commissioner Philip Moeller, who moderated the discussion among the CEOs, said, “We have to think about the alternative that FERC frankly does lose jurisdiction so that in a hurry states can come up with best practices on [demand response] as a necessary element of getting through some extreme weather events.”

For PJM’s Duane, the jurisdiction struggle over demand response may mask a larger challenge for the industry. “If technology and regulatory models can change to accommodate customer preferences — where they want that kind of engagement and participation in the marketplace — then my answer to companies like FirstEnergy is ‘your business model is going to have to change as well.’ That’s the bigger-picture kind of story.”