Recognizing the Importance of Demand Response: The Second Half of the Wholesale Electric Market Equation

Synopsis: The electric industry in the United States has experienced significant changes over the past several decades, the primary one being a shift from a system dominated by vertically-integrated utilities operating under cost-of-service regulation to one with increasing expansion of independent power producers and the potential for enhanced consumer benefits from more competitive wholesale markets. During much of that transition to date, however, the Federal Energy Regulatory Commission has focused far more on the supply side of the wholesale electric market equation man on the demand side of that equation. This article contends that the Commission has a strong legal basis for assuming jurisdiction over facilitating demand response in wholesale electric markets, and that such action on the demand side of the equation is warranted by the benefits associated with robust load participation in those markets. This article also recognizes that the states have traditionally regulated demand response and that they will continue to play an important role in cultivating its full benefits for electricity consumers. Therefore, this article further contends that enhancing coordination of federal and state initiatives offers the most promising approach to managing the jurisdictional overlap in this area. I. Introduction The electric industry in the United States has experienced significant changes over the past several decades, the primary one being a shift from a system dominated by vertically-integrated utilities operating under cost-ofservice regulation to one with increasing expansion of independent power producers and the potential for robust wholesale markets and enhanced competition. An important principle underlying this industry restructuring is that greater reliance on more competitive markets will bring greater benefits to the country's electricity consumers. Markets, in turn, rely on two sides of an equation: at a basic level, market prices result from the interaction of supply and demand. During much of the electric industry's transition to date, however, the Federal Energy Regulatory Commission (Commission) has primarily focused on the supply side of that equation, seeking to increase consumer benefits by providing open access to transmission services and reducing transmission congestion such that more generation is able to participate in the market, as well as promoting economic dispatch of generation over wider operational footprints. That focus has meant that the Commission has only recently looked to aggressively pursue robust market participation by loads, or the demand side in the wholesale electric market equation. Consequently, as noted regulatory analyst Eric Hirst observed in 2001, "Competitive wholesale markets . resemble the sound of one hand clapping. They are often inefficient and not fully competitive, in part because retail-customer loads do not participate in these markets. "3 Despite recent efforts by the Commission to incorporate demand response into wholesale electric markets, those markets remain underdeveloped, and the country's electricity consumers do not receive the full benefits of a robust marketplace. This article contends that, as a response to the current state of wholesale electric markets, the Commission must continue to play an active role in the development of robust load participation in those markets. section II of this article describes benefits that research suggests are likely to stem from increased use of demand response, or the modification of consumer demand in the short term that can be defined more specifically as follows: "Changes in electric usage by end-use customers from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized. "4 Modification of consumer demand in a longer timeframe includes changes such as the installation of more energy efficient appliances and technologies. …