**Federal Energy Regulatory Commission**

**Technical Conference on Competition in Wholesale Markets**

**Richard Doying, Vive President Market Operations**

**Midwest Independent System Operator**

**May 8, 2007**

[Panel 1: Demand Response in Organized Markets:]{.underline}

Midwest ISO believes that demand elasticity is essential to well
functioning markets. Markets work best when:

1.  There is vigorous participation by both buyers and sellers.

2.  There are low barriers to entry into the wholesales markets by both
    buyers and sellers.

3.  Prices are transparent and provide accurate price signals.

Demand responders are typically not in the business of providing energy,
however, if compensated fairly in a manner that reflects their costs of
reducing load, many may be ready to participate. The Midwest ISO markets
currently include several opportunities for demand participation, but
important limitations exist.

The Day-Ahead market offers full flexibility for demand participation.
Real-Time opportunities largely consist of the ability to reduce
consumption in response to price signals, which poses greater price risk
for demand than for generators. Demand can also typically not set prices
in Real-Time.

The Midwest ISO relies on market approaches to encourage demand
participation in wholesale markets, including:

1)  Market mechanisms in place today allow direct participation by
    demand in Day-Ahead and Real-Time energy markets through price
    sensitive bids. The ancillary services markets will significantly
    enhance the ability of demand response to participate in these
    wholesale markets.

2)  Well defined settlement pricing points (CPNodes) allow both buyers
    and sellers to receive price signals that reflect the value of
    energy at a specific location, instead of having just one side of
    the market (generation) receive the appropriate one.

3)  Demand response may count toward satisfaction of capacity
    obligations and currently provide approximately 8,000 MW of capacity
    in the Midwest ISO region.

4)  Demand response may serve as an emergency resource and contributed
    nearly 3,000 MW during the 2007 winter peak.

5)  The Midwest ISO is moving towards full incorporation of demand
    response into the regional transmission planning (MTEP) process.

6)  Evaluation and removal of barriers that may inhibit economic demand
    response. The Midwest ISO, with stakeholder, have to developed a
    proposal to modify Revenue Sufficiency Guarantee (RSG) settlement
    rules that currently may penalize demand response provided during
    emergency conditions.

7)  Development of new market mechanisms for price responses demand to
    fully participate in the Real-Time market as a dispatchable
    resource, eligible to set market clearing prices.

Significant barriers exist to full demand participation, even when
mechanisms to facilitate demand participation exists:

1.  Retail/wholesale regulatory structures can influence the amount of
    demand response eligible to participate in wholesale markets. The
    link between a wholesale market platform with wholesales prices and
    retail rates that end-use customers ultimately see is critical.
    Ultimately, it is the end-use customers that are best situated to
    evaluate the value of consumption and respond to price signals.
    Where retail load sees monthly average prices, price signals do not
    provide incentives to evaluate the relative costs and benefits of
    consumption.

2.  Ratemaking treatment may reduce incentives to bring available demand
    response to the market. Where the benefits of demand response are
    not shared between the wholesale and retail buyers there is little
    to no incentive to deploy demand resources even when otherwise
    economic.

3.  Demand response programs currently in place were often developed in
    a different market/regulatory environment. Responsive demand under
    these programs is often not readily adapted to the new wholesale
    market framework (response times, conditions under which load
    reductions may be called, etc.).

4.  Institutional barriers can inhibit demand response. Adapting demand
    response to increase certainty of delivery in order to provide
    confidence in the ability of demand response to provide critical
    reliability services will take new market mechanisms, data, training
    and time.

5.  Market clearing prices when value of demand response is highest
    often do not accurately reflect supply scarcity. In fact, when
    demand response is called, prices typically move in the wrong
    direction muting the incentive to economically reduce demand or to
    bring additional resources to market. It is critical that price
    signals in the market accurately reflect the costs to serve demand
    at the demand location and moment in time.

    -   Current scarcity pricing mechanisms help. Under emergency
        condition, the Midwest ISO may call on operating reserves for
        energy production with offer prices for those reserves set at
        \$1,000/MWh. Recently approved ARC goes another step, allowing a
        portion of reserves to be called in non-emergency situations
        with offer prices that reflect peaking resources that would
        otherwise be used. The ultimate solution is co-optimization of
        energy and reserves within an ancillary services market, as is
        currently done in NY ISO and has been proposed in the Midwest
        ISO.

The Midwest ISO continues to work with stakeholders to identify
enhancements to the wholesale market platform to provide additional
opportunities for demand participation. In addition to the increased
demand response mechanisms in the proposed ancillary services markets,
the Midwest ISO is:

1.  Proposing to modify the tariff RSG settlement rules to remove
    barriers to Real-Time economic demand response.

2.  Working with the stakeholder Demand Response Task Force (DRTF) to
    develop proposed rules to compensate demand reductions taken at the
    direction of the Midwest ISO in Real-Time, to assure fair
    compensation for such reductions.

3.  Developing enhancements to existing market mechanisms as well as new
    mechanisms to allow flexible participation in Real-Time energy and
    ancillary services markets.