130 FERC ¶ 61,213 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

18 CFR Part 35 

Demand Response Compensation in Organized 

Wholesale Energy Markets 

PJM Interconnection, L.L.C. 

Docket No.

 Docket No. 

RM10-17-000 

EL09-68-000 

(March 18, 2010) 

AGENCY: Federal Energy Regulatory Commission 

ACTION: Notice of Proposed Rulemaking. 

SUMMARY: The Federal Energy Regulatory Commission is issuing a Notice of 

Proposed Rulemaking (NOPR) proposing an approach for compensating demand 

response resources in order to improve the competitiveness of organized wholesale 

energy markets and thus ensure just and reasonable wholesale rates. The Commission 

invites all interested persons to submit comments in response to the regulatory text 

proposed herein. 

 DATES: Comments are due 45 days after publication in the Federal Register. 

ADDRESSES: You may submit comments, identified by docket number by any of the 

following methods: 

 Agency Web Site: http://ferc.gov. Documents created electronically using word 

processing software should be filed in native applications or print-to-PDF format 

and not in a scanned format. 
Docket Nos. RM10-17-000 and EL09-68-000 ii 

 Mail/Hand Delivery: Commenters unable to file comments electronically must 

mail or hand deliver an original and 14 copies of their comments to: Federal 

Energy Regulatory Commission, Secretary of the Commission, 888 First Street, 

N.E., Washington, DC 20426. 

Instructions: For detailed instructions on submitting comments and additional 

information on the rulemaking process, see the Comment Procedures Section of this 

document. 

FOR FURTHER INFORMATION CONTACT: 

Arnie Quinn 

Federal Energy Regulatory Commission, Office of Energy Policy & Innovation 

888 First Street, NE 

Washington, DC 20426 

(202) 502-8693 

arnie.quinn@ferc.gov

Helen Dyson 

Federal Energy Regulatory Commission, Office of the General Counsel 

888 First Street, NE 

Washington, DC 20426 

(202) 502-8856 

helen.dyson@ferc.gov 

SUPPLEMENTARY INFORMATION:
130 FERC ¶ 61,213 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Demand Response Compensation in Organized 

Wholesale Energy Markets 

PJM Interconnection, L.L.C. 

Docket No.

 Docket No. 

RM10-17-000 

EL09-68-000 

NOTICE OF PROPOSED RULEMAKING 

(March 18, 2010) 

TABLE OF CONTENTS

Paragraph Numbers

I. Background ............................................................................................................................2.

A. Role of Demand Response in Organized Wholesale Energy Markets.............................2.

B. Current ISO and RTO Demand Response Programs .......................................................7.

C. The Need for Reform .......................................................................................................9.

II. Discussion.............................................................................................................................11.

III. Information Collection Statement .......................................................................................24.

IV. Environmental Analysis ......................................................................................................32.

V. Regulatory Flexibility Act Certification...............................................................................33.

VI. Comment Procedures ..........................................................................................................41.

VII. Document Availability.......................................................................................................45.
130 FERC ¶ 61,213 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Demand Response Compensation in Organized 

Wholesale Energy Markets 

PJM Interconnection, L.L.C. 

Docket No.

Docket No.

RM10-17-000 

EL09-68-000 

NOTICE OF PROPOSED RULEMAKING 

(March 18, 2010) 

1. The Federal Energy Regulatory Commission (Commission) is proposing to revise 

its regulations to establish the approach described below as compensation for demand 

response1

 resources

2

 participating in organized energy markets. We propose that 

Independent System Operators (ISOs) and Regional Transmission Organizations 

(RTOs)3

 with tariff provisions permitting demand response providers to participate as 

resources in energy markets by reducing consumption of electricity from their expected 

 1

 Demand response means a reduction in the consumption of electric energy by 

customers from their expected consumption in response to an increase in the price of 

electric energy or to incentive payments designed to induce lower consumption of electric 

energy. 18 CFR § 35.28 (b)(4). 

2

 Demand response resource means a resource capable of providing demand 

response. 18 CFR § 35.28 (b)(5). 

3

 The following RTOs and ISOs have organized wholesale electricity markets: 

PJM Interconnection, L.L.C. (PJM); New York Independent System Operator, Inc. 

(NYISO); Midwest Independent Transmission System Operator, Inc. (Midwest ISO); 

ISO New England, Inc. (ISO-NE); California Independent System Operator Corp. 

(CAISO); and Southwest Power Pool, Inc. (SPP). 
Docket Nos. RM10-17-000 and EL09-68-00 - 2 -

l 

ons.

4

 

levels in response to price signals be required to pay to demand response providers, in al

hours, the market price for energy for such reducti

I. Background

A. Role of Demand Response in Organized Wholesale Energy Markets

2. The Commission has acted over the last several decades to implement 

Congressional policy to expand the wholesale energy markets to facilitate entry of new 

resources and support competitive markets. Most recently, the Commission in Order No. 

719 implemented a series of reforms aimed at improving the competitiveness of the 

organized energy markets, finding that effective wholesale competition protects 

consumers by, among other things, providing more supply options, encouraging new 

entry and innovation, and spurring deployment of new technologies.5

 Improving the 

 4

 This provision applies only to demand response acting as a resource in organized 

wholesale energy markets. The provision will not apply to demand response under 

programs that ISOs and RTOs administer for reliability or emergency conditions, such as, 

for instance, Midwest ISO’s Emergency Demand Response; NYISO’s Emergency 

Demand Response Program; PJM’s Emergency Load Response; and ISO-NE’s RealTime 30-Minute Demand Response Program, Real-Time and 2-Hour Demand Response 

Program, and Real-Time Profiled Response Program. This provision also will not apply 

to compensation in ancillary services markets, which the Commission has addressed 

elsewhere. See e.g., Wholesale Competition in Regions with Organized Electric Markets, 

Order No. 719, 73 Fed. Reg. 64,100 (Oct. 28, 2008), FERC Stats. & Regs. P 31,281 

(2008) (Order No. 719 or Final Rule). 

5 See Order No. 719 at P 1; see also Regional Transmission Organizations, Order 

No. 2000, FERC Stats. & Regs. ¶ 31,089, at P 1 (1999), order on reh'g, Order No. 2000-

A, FERC Stats. & Regs. ¶ 31,092 (2000), aff'd sub nom. Pub. Util. Dist. No. 1 of 

Snohomish County, Washington v. FERC, 272 F.3d 607, 348 U.S. App. D.C. 205 

(continued...) 
Docket Nos. RM10-17-000 and EL09-68-00 - 3 -

 

competitiveness of organized wholesale markets, the Commission concluded, is therefore 

“integral to the Commission fulfilling its statutory mandate to ensure supplies of electric 

energy at just, reasonable, and not unduly discriminatory or preferential rates.”6

 

3. As the Commission recognized in Order No. 719, active participation by 

customers in organized wholesale energy markets through demand reductions helps to 

increase competition in those markets.7

 Demand reductions whereby customers reduce 

electricity consumption from normal usage levels in response to price signals can 

generally occur in two ways: (1) customers reduce demand by responding to dynamic 

rates that are based on wholesale prices (sometimes called “price-responsive demand”); 

and (2) customers can provide demand response that acts as a resource in wholesale 

markets to balance supply and demand. While a number of states and utilities are 

pursuing retail-level price-responsive demand initiatives based on dynamic and timedifferentiated retail prices and utility investments, these are state initiatives, and, thus, are 

not the subject of this proceeding.8

 Our focus here is on customers providing - through 

bids - demand response that acts as a resource in organized wholesale energy markets. 

(D.C. Cir. 2001). 

6

 Order No. 719 at P 1. 

7 See Order No. 719 at P 48. 

8

 Some ISOs and RTOs are engaged in stakeholder discussions concerning the 

coordination necessary between wholesale markets and retail rate design, and we expect 

(continued...) 
Docket Nos. RM10-17-000 and EL09-68-00 - 4 -

 

4. Demand response acting as a resource in organized wholesale energy markets 

helps to improve the functioning and competitiveness of such markets in several ways. 

First, demand response can lower prices. When bid directly into the wholesale market, 

demand response – which results in lower demand – can result in lower clearing prices.9

 

For example, a study conducted by PJM, which simulated the effect of demand response 

on prices, demonstrated that a modest three percent load reduction in the 100 highest 

peak hours corresponds to a price decline of six to 12 percent.10 Demand response can 

also lower prices in the organized wholesale energy markets by reducing the need to 

dispatch higher-priced generation, or construct new generation, in an effort to satisfy 

load.11 Second, demand response can mitigate generator market power.12 This is 

to address any filings emerging from those discussions in future proceedings. 

9 Wholesale Competition in Regions with Organized Electric Markets, Order No. 

719-A, FERC Stats. & Regs. ¶ 31,292 (2009). 

10 ISO-RTO Council Report, Harnessing the Power of Demand How ISOs and 

RTOs Are Integrating Demand Response into Wholesale Electricity Markets, found at 

http://www.isorto.org/atf/cf/%7B5B4E85C6-7EAC-40A0-8DC3-

003829518EBD%7D/IRC_DR_Report_101607.pdf. 

11 Id. (“Demand response tends to flatten an area’s load profile, which in turn may 

reduce the need to construct and use more costly resources during periods of high 

demand; the overall effect is to lower the average cost of producing energy.”). Similarly, 

NYISO “has experienced a significant increase in the registration of the [demand 

response] programs that have effectively reduced the need for additional [generation] 

capacity resources to the system based on customer pledges to cut energy usage on 

demand.” See NYISO’s 2009 Comprehensive Reliability Plan at 3, found at 

http://www.nyiso.com/public/webdocs/newsroom/planning_reports/CRP__FINAL_5-19-

(continued...) 
Docket Nos. RM10-17-000 and EL09-68-00 - 5 -

e has 

ce 

 

because the more demand response is able to reduce demand, the more downward 

pressure it places on generator bidding strategies by increasing the risk to a supplier that 

it will not be dispatched if it bids a price that is too high.13 Third, demand respons

the potential to support system reliability and address resource adequacy14 and resour

management challenges surrounding the unexpected loss of generation.15 

09.pdf. 

12 See Comments of NYISO’s Market Monitor filed in Docket No. ER09-1142-

000, May 15, 2009 (Demand response “contributes to reliability in the short-term, 

resource adequacy in the long-term, reduces price volatility and other market costs, and 

mitigates supplier market power.”). 

13 Id.

14 See ISO-RTO Council Report, Harnessing the Power of Demand How ISOs and 

RTOs Are Integrating Demand Response into Wholesale Electricity Markets at 4, found 

at http://www.isorto.org/atf/cf/%7B5B4E85C6-7EAC-40A0-8DC3-

003829518EBD%7D/IRC_DR_Report_101607.pdf (“Demand response contributes to 

maintaining system reliability. Lower electric load when supply is especially tight 

reduces the likelihood of load shedding. Improvements in reliability mean that many 

circumstances that otherwise result in forced outages and rolling blackouts are averted, 

resulting in substantial financial savings . . . .”); Smart Grid Policy, 126 FERC ¶ 61,253, 

at P 19 and n.23 (2009) (“The Smart Grid concept envisions a power system architecture 

that permits two-way communication between the grid and essentially all devices that 

connect to it, ultimately all the way down to large consumer appliances. . . . Once that is 

achieved, a significant proportion of electric load could become an important resource to 

the electric system, able to respond automatically to customer-selected price or dispatch 

signals delivered over the Smart Grid infrastructure without significant degradation of 

service quality.”). 

15 For instance, in ERCOT, on February 26, 2008, through a combination of a 

sudden drop in power supplied by wind generators, a quicker-than-expected ramping up 

of demand, and the loss of thermal generation, ERCOT found itself short of reserves. 

(continued...) 
Docket Nos. RM10-17-000 and EL09-68-00 - 6 -

5. Given its ability to lower electricity prices and ensure reliability, demand response 

can play a critical role in helping the Commission fulfill its mandate under the Federal 

Power Act (FPA) to ensure that rates charged for energy are just and reasonable.16 

Accordingly, and consistent with national policy requiring facilitation of demand 

response,

17 the Commission has acted to remove barriers to participation of demand 

response resources in organized wholesale electricity markets. For example, in Order 

No. 890, the Commission modified the pro forma Open Access Transmission Tariff to 

allow non-generation resources, including demand response resources, to be used in the 

provision of certain ancillary services where appropriate on a comparable basis to service 

provided by generation resources.18 Order No. 890-A further requires transmission 

 

The system operator called on all demand response resources, and 1200 MW of Load 

acting as Resource (LaaRs) responded within ten minutes, bringing ERCOT back into 

balance, from 59.85 Hz back to 60 Hz. 

16 16 U.S.C. § 824d (2006). 

17 See EPAct 2005, Pub. L. No. 109-58, § 1252(f), 119 Stat. 594, 965 (2005) (“It is 

the policy of the United States that . . . unnecessary barriers to demand response 

participation in energy, capacity, and ancillary service markets shall be eliminated.”). 

18 Preventing Undue Discrimination and Preference in Transmission Service, 

Order No. 890, FERC Stats. & Regs. ¶ 31,241 at P 887-88 (2007), order on reh’g, Order 

No. 890-A, FERC Stats. & Regs. ¶ 31,261 (2007), order on reh'g and clarification, Order 

No. 890-B, 73 Fed. Reg. 39092 (Jul. 8, 2008), 123 FERC ¶ 61,299 (2008), order on reh'g, 

Order No. 890-C, 126 FERC ¶ 61,228 (2009), order on clarification, Order No. 890-D, 

129 FERC ¶ 61,126 (2009). 
Docket Nos. RM10-17-000 and EL09-68-00 - 7 -

providers to develop transmission planning processes that treat all resources, including 

demand response, on a comparable basis.19 

6. The Commission built on these reforms in Order No. 719, requiring ISOs and 

RTOs to, among other things, accept bids from demand response resources in their 

markets for certain ancillary services on a basis comparable to other resources.20 The 

Commission also required each ISO and RTO “to reform or demonstrate the adequacy of 

its existing market rules to ensure that the market price for energy reflects the value of 

energy during an operating reserve shortage,”21 for purposes of encouraging existing 

generation and demand resources to continue to be relied upon during an operating 

reserve shortage, and encouraging entry of new generation and demand resources.22 

B. Current ISO and RTO Demand Response Programs

7. In addition to the foregoing efforts, the Commission has issued orders in recent 

years approving various types of ISO and RTO demand response programs. As noted 

above, some of these programs are administered for reliability and emergency conditions. 

Apart from these programs, wholesale customers and qualifying large retail customers 

 19 Order No. 890-A at P 216. 

20 Order No. 719 at P 47-49. 

21 Id. P 194. 

22 Id. P 247. 
Docket Nos. RM10-17-000 and EL09-68-00 - 8 -

 

may bid demand response directly into the day-ahead and real-time energy markets, 

certain ancillary service markets and capacity markets.23 Demand response providers 

participating as resources in the day-ahead and real-time energy markets are the subject 

of this proceeding. 

8. With particular regard to demand response compensation for this latter category of 

resources, the Commission previously has allowed a system-by-system approach, 

whereby each RTO and ISO has developed its own compensation methodologies for 

demand response resources in its energy market. As a result, the levels of compensation 

for demand response vary significantly among RTOs and ISOs. PJM pays the Locational 

Marginal Price (LMP)24 minus the generation and transmission portions of the retail 

23 Other demand response programs allow demand response to be used as a 

capacity resource and as a resource during system emergencies or permit the use of 

demand response for synchronized reserves and regulation service. See, e.g., PJM 

Interconnection, L.L.C., 117 FERC ¶ 61,331 (2006); Devon Power LLC, 115 FERC 

¶ 61,340, order on reh’g, 117 FERC ¶ 61,133 (2006), appeal pending sub nom., Maine 

Pub. Utils. Comm’n v. FERC, No. 06-1403 (D.C. Cir. 2007); New York Indep. Sys. 

Operator., Inc., 95 FERC ¶ 61,136 (2001); NSTAR Services Co. v. New England Power 

Pool, 95 FERC ¶ 61,250 (2001); New England Power Pool and ISO New England, Inc., 

100 FERC ¶ 61,287, order on reh’g, 101 FERC ¶ 61,344 (2002), order on reh’g, 

103 FERC ¶ 61,304, order on reh’g, 105 FERC ¶ 61,211 (2003); PJM Interconnection, 

L.L.C., 99 FERC ¶ 61,227 (2002). 

24 LMP refers to the price calculated by the ISO or RTO at particular locations or 

electrical nodes within the ISO or RTO footprint and is used as the market price to 

compensate generators. There are variations in the way ISOs and RTOs calculate LMP; 

however, each method establishes the marginal value of resources in that market. 

Nothing in this NOPR is intended to change ISO and RTO methods for calculating LMP. 
Docket Nos. RM10-17-000 and EL09-68-00 - 9 -

 

rate.25 ISO-NE and NYISO currently pay LMP when prices are above a threshold level, 

with the levels differing between the RTOs.26 The Midwest ISO currently has a program 

that pays LMP for demand response in the real-time energy market when the demand 

response provider has purchased the amount reduced in the day-ahead market for energy 

and ancillary services.27 CAISO pays LMP in its participating load program that allows 

qualifying resources to provide day-ahead and real-time energy and non-spinning 

reserves.28 SPP currently has no demand response program at all.29 ISOs and RTOs 

25 PJM FERC Electric Tariff, Sixth Revised Sheet No. 388D.01. 

26 For example, under ISO-NE’s Real Time Price Response Program, the 

minimum bid is $100/MWh and a demand response resource is paid the higher of LMP 

or $100/MWh. See Section III.1.3 of the ISO New England Transmission, Markets and 

Services Tariff, Section 1 of the Second Restated New England Power Pool Agreement. 

NYISO implements a day-ahead demand response program by which resources bid into 

the market at a minimum of $75/MWh and can get paid the LMP. See NYISO 

Incentivized Day-Ahead Economic Load Curtailment Program, Fifth Revised Tariff 

Sheet No. 34-34A, 89. 

27 See Charges and Credits for Real-Time Energy and Operating Reserve Market 

Energy Purchases and Sales Associated with Demand Response Resources. Midwest 

ISO FERC Electric Tariff, Fourth Revised Volume No. 1, Second Revised Sheet No. 

1114. 

28 See section 11.2.1.1 IFM Payments for Supply of Energy, CAISO FERC 

Electric Tariff. 

29 However, the Commission has directed SPP to report on ways it can 

incorporate demand response into its imbalance market. Southwest Power Pool, 

Inc., 114 FERC ¶ 61,289, at P 229 (2006). In its orders addressing SPP’s compliance 

with Order No. 719, the Commission also directed SPP to make a subsequent 

compliance filing addressing demand response participation in its organized markets. 

(continued...) 
Docket Nos. RM10-17-000 and EL09-68-00 - 10 -

have continued to examine the effectiveness of demand response compensation in their 

respective regions, and, as a result, the issue of proper compensation continues to be the 

subject of several proceedings.30 

C. The Need for Reform

9. Despite the benefits of demand response and various efforts by the Commission, 

ISOs and RTOs to address barriers to and compensation for demand response 

participation, demand response providers collectively play a small role in wholesale 

markets. After several years of observing demand response participation in ISO and 

RTO markets with different, and often evolving, demand response compensation 

structures, the Commission is concerned that some existing, inadequate compensation 

structures have hindered the development and use of demand response. The impediment 

has been addressed at Commission-sponsored technical conferences concerning demand 

response, where participants have confirmed that customers “must have confidence that 

appropriate price signals will be sustained by stable competitive pricing structures, before 

 

Southwest Power Pool, Inc., 129 FERC ¶ 61,163, at P 51 (2009). 

30 See PJM Interconnection, L.L.C., Docket No. EL09-68-000; ISO New England, 

Inc., Docket No. ER09-1051-000; ISO New England, Inc., Docket No. ER08-830-000; 

Midwest Indep. Transmission Sys. Operator, Inc., Docket No. ER09-1049-000. 
Docket Nos. RM10-17-000 and EL09-68-00 - 11 -

 

they will make an investment in demand response.”31 Some participants have advised 

that demand response quite simply will not occur without adequate compensation.32 

10. Indeed, there are indications that demand response resources react correspondingly 

to increases or decreases in payment. PJM provides a case study on this point. It first 

implemented its Economic Load Response Program (Economic Program) providing for 

demand response compensation in June 2002.33 Several years later, starting in January 

2008, when PJM reduced its compensation for demand response, settled demand 

reductions began decreasing from previous years.34 Specifically, PJM’s Market Monitor 

noted that, from 2007 to 2008, following the decrease in compensation, settled demand 

31 Transcript of Order No. 719 technical conference at 24, statement by James 

Eber, Director of Demand Response at Commonwealth Edison, found at 

http://www.ferc.gov/EventCalendar/EventDetails.aspx?ID=3994&CalType=%20&Calen

darID=116&Date=05/21/2008&View=Listview. 

32 See Statements of Larry Stalica, Vice President, Linde Energy Services, Inc. 

FERC Technical Conference- Demand Response in Organized Electric Markets, May 21, 

2008, found at http://www.ferc.gov/EventCalendar/Files/20080521081612-

Stalica,%20Linde%20Energy%20Services.pdf. (“The mere avoidance of electricity 

prices often provides insufficient value to offset these real costs. Demand response will 

not occur if customers do not have an economic incentive to reduce consumption."). 

33 See PJM Interconnection, L.L.C., 99 FERC ¶ 61,227 (2002). PJM’s Economic 

Program provided for payment of LMP for all demand response reductions when LMP 

equaled or exceeded $75/MWh and paid LMP minus the generation and transmission 

components of the retail rate when LMP was less than $75/MWh. 

34 The tariff provision providing for payment of LMP when LMP equaled or 

exceeded $75/MWh terminated by its terms on December 31, 2007, and, since then, PJM 

has paid only LMP minus the generation and transmission components of the retail rate. 
Docket Nos. RM10-17-000 and EL09-68-00 - 12 -

reductions decreased by 36.8 percent, from 714,200 MWh to 458,300 MWh, and the 

decline has continued at least through March 2009.35 Although the Commission had 

rejected a request to prevent the compensation decrease from occurring as per the terms 

of PJM’s then-existing tariff, the Commission encouraged PJM and its stakeholders to 

continue analyzing the effectiveness of PJM’s demand response program with the 

decreased payments for demand response.36 Based upon our own review, the 

Commission is now concerned that evidence of demand reductions in PJM, and 

inadequate demand response participation , now and in the future, may be the result of 

compensation that is no longer just and reasonable, because, as detailed below, the 

existing and varying levels of compensation generally fail to reflect the marginal value of 

demand response resources to ISO and RTO energy markets. 

II. Discussion

11. Given the importance of demand response resources to the competitiveness of 

organized wholesale electricity markets, and based upon our experience to date with 

demand response in the ISO- and RTO-administered markets, the Commission proposes 

to address compensation for demand response resources participating in organized 

wholesale energy markets generically in this proceeding. The Commission proposes to 

 35 Monitoring Analytics, Barriers to Demand Side Response in PJM at 22 (July 1, 

2009). 

36 PJM Interconnection, L.L.C., 121 FERC ¶ 61,315, at P 29 (2007). 
Docket Nos. RM10-17-000 and EL09-68-00 - 13 -

 

add section 35.18(g)(1)(v) to our regulations to establish a specific compensation 

approach for demand response resources participating in organized wholesale energy 

markets (such as the day-ahead and real-time markets administered by the ISOs and 

RTOs). Under the proposed section, each Commission-approved ISO and RTO that has a 

tariff provision providing for participation of demand response resources in its energy 

market must pay demand response resources, in all hours, the market price for energy, 

i.e., full LMP, for demand reductions made in response to price signals.37 

12. The Commission proposes to take this action generically to address issues that are 

common to the RTO and ISO markets in a coordinated manner in a single proceeding. 

As discussed further below, we believe paying demand response resources the LMP in all 

hours will compensate those resources in a manner that reflects the marginal value of the 

resource to each RTO and ISO, comparable to treatment of generation resources. This 

will improve the competitiveness of the organized wholesale energy markets and, in turn, 

help to ensure that energy prices in those markets are just and reasonable. 

13. As explained above, we have previously accepted a variety of ISO and RTO 

proposals for compensation for demand response providers, with different levels of 

37 This provision will not apply to programs that ISOs and RTOs administer for 

reliability or emergency conditions. In those situations, the ISO and RTO tariffs may 

provide compensation that is not necessarily related solely to energy prices but is 

designed to prevent involuntary load curtailment. 
Docket Nos. RM10-17-000 and EL09-68-00 - 14 -

 

payment. As we have gained experience with these programs, we are concerned that the 

current compensation levels appear to have become unjust and unreasonable. Providers 

may submit price and quantity bids into the organized wholesale energy markets and the 

market clears at the marginal resource yet they fail to compensate demand response at 

levels that reflect the marginal value of the resource being used by the RTO or ISO to 

balance supply and demand. The current wholesale compensation levels may therefore 

be leading to under-investment in demand response resources, resulting in higher, and 

unjust and unreasonable, prices in the organized electricity markets. To help ensure that 

wholesale prices in ISOs and RTOs remain just and reasonable, we are proposing to 

require each ISO and RTO to pay the LMP to demand response providers participating in 

the organized wholesale energy markets. 

14. It is a well-established practice in the organized wholesale energy markets to rely 

on LMPs to encourage efficient behavior by market participants. The LMP represents the 

value of additional supply or reductions in consumption at each node within the RTO or 

ISO and, thus, reflects the marginal cost of the last unit necessary to efficiently balance 

supply and demand.38 The LMP is therefore the primary mechanism for compensating 

38 See ISO New England, Inc., 100 FERC ¶ 61,287, at P 71 (2002) (LMP 

“provide[s] appropriate price signals indicating the value of additional resources or 

conservation at each node in the transmission system”); Cleco Power LLC, et al., 

103 FERC ¶ 61,272, at P 67 (2003) (“It is widely observed that markets work efficiently 

when prices reflect marginal costs, i.e., when the market price will be equal to the cost of 

(continued...) 
Docket Nos. RM10-17-000 and EL09-68-00 - 15 -

 

generation resources clearing in the organized electricity markets, which the Commission 

has found encourages “more efficient supply and demand decisions in both the short run 

and long run.”39 

15. Given that the LMP represents the marginal value of the resource being used by 

the RTO or ISO to balance supply and demand, it follows that the LMP should be paid to 

any resource clearing in the RTO’s or ISO’s energy market. In balancing supply and 

demand, a one megawatt reduction in demand is equivalent to a one megawatt increase in 

energy for purposes of meeting load requirements and maintaining a reliable electric 

system. The ISO or RTO is able to avoid dispatching suppliers with higher bids, be they 

generation or demand response, by accepting a lower bid to either reduce consumption or 

increase generation. As Dr. Alfred E. Kahn noted in a recent PJM proceeding in Docket 

No. EL09-68-000, consumers offering to reduce consumption should be induced “to 

behave as they would if the market mechanisms alone were capable of rewarding them 

directly for efficient economizing.”40 This is because “the (incremental) costs saved by 

curtailments in demand clearly will be LMP - including the marginal costs of generation. 

bringing to market the last unit necessary to balance supply and demand.”).

39 See New England Power Pool, 101 FERC ¶ 61,344, at P 35 (2002). 

40 Kahn Affidavit at 4. 
Docket Nos. RM10-17-000 and EL09-68-00 - 16 -

 

So, in the end the LMP inducement is the economically correct one.”41 This appears to 

be true across all ISOs and RTOs and, therefore, it appears appropriate to compensate 

both generation and demand response resources participating in the organized wholesale 

electricity markets at the LMP. 

16. Ultimately, the markets themselves will determine the level of generation and 

demand response resources needed to balance energy and demand. The level of 

compensation provided to each resource, however, affects its willingness and ability to 

participate in the market. 42 For example, demand response resources need to make 

investments in technologies to enable participation in the organized wholesale energy 

markets, as well as incur costs in changing their operations in order to provide demand 

response. In those markets paying less than the LMP to demand response resources, such 

resources have less revenues to support investment in demand response-enabling 

technology (such as metering equipment, energy usage monitors and process controls) 

necessary to enable more wholesale market participation by demand response resources. 

Where compensation for demand response is inadequate, demand response resources will 

be hesitant to invest in demand response devices. Compared to existing compensation 

41 Id. at 3. 

42 Generation and demand response resources have the potential to earn other 

revenues through bilateral arrangements, capacity markets where they exist, and ancillary 

services. 
Docket Nos. RM10-17-000 and EL09-68-00 - 17 -

 

levels, paying the LMP in all hours should allow more demand response resources to 

cover their investment costs and increase their ability to participate in the organized 

wholesale electric markets. 

17. Increased levels of demand response participation, in turn, should lead to lower 

clearing prices in the organized wholesale energy markets. As the Commission explained 

in accepting PJM’s Economic Load Response Program: 

Without a demand response mechanism, [an independent system operator] 

is forced to work under the assumption that all customers have an inelastic 

demand for energy and will pay any price for power. There is ample 

evidence that this is not true. Many customers, given the right tools, can 

and will manage their demand. . . . A working demand response program 

puts downward pressure on price, because suppliers have additional 

incentives to keep bids close to their marginal production costs and high 

supply bids are more likely to reduce the bidder's energy sales. Appropriate 

price signals to customers thus helps to mitigate market power as high 

supply bids are more likely to reduce the bidders' energy sales. Suppliers 

thus have additional incentive to keep bids close to their marginal 

production costs.[43]

18. Additionally, increasing the aggregate amount of demand response resources in 

the organized wholesale energy markets will help to move prices closer to the levels that 

would result if all demand could respond to the marginal cost of energy. Paying the LMP 

to those potential demand response resources who are capable of responding – but who 

43 PJM Interconnection, L.L.C., 99 FERC ¶ 61,227, at 61,939 (2002) (quoting PJM 

Interconnection, L.L.C., 99 FERC ¶ 61,139, at 61,573 (2002)). 
Docket Nos. RM10-17-000 and EL09-68-00 - 18 -

have not been participating as a resource due to inadequate compensation – should bring 

those additional demand response resources into the organized wholesale energy markets. 

But again, the markets themselves will determine the appropriate level of demand 

response, and generation, resources needed by the ISO and RTO to balance energy and 

demand based on their relative bids into the markets. 

19. We recognize that the appropriate level of compensation for demand response 

resources participating in organized wholesale energy markets has been the subject of 

debate. In various proceedings, some parties have advocated payment of LMP minus 

components of the retail rate, on the theory that such an approach permits all consumers 

to react as if they were paying LMP.44 Some parties have argued that payment of LMP is 

appropriate only during the most expensive hours,45 on the theory that demand response 

will have the greatest impact during those hours in which the aggregate supply curve is 

steep (i.e., when supply is less elastic). Given the current barriers to demand response46

 44 Professor William W. Hogan has argued, for instance, that payment of LMP 

(without an offset for some portion of the retail rate) over-compensates individual 

demand response providers and might result in more demand response than is efficient. 

See Attachment to Answer of Electric Power Supply Association, Providing Incentives 

for Efficient Demand Response, William W. Hogan, October 29, 2009, submitted in 

Docket No. EL09-68-000. 

45 See PJM’s Transmittal Letter at 29 submitted in Docket No. EL09-68-000. 

46 A recent Commission Staff report details several barriers to demand response, 

including regulatory barriers, such as lack of a direct connection between wholesale and 

(continued...) 
Docket Nos. RM10-17-000 and EL09-68-00 - 19 -

 

and the evolving nature of the technology enabling demand response, a perfect solution 

or payment scheme may not exist. We nonetheless believe that paying LMP in all hours 

to the demand response resources that can participate in the organized wholesale energy 

markets is the correct approach at this time, because that payment reflects the marginal 

effect of each demand response resource in the hour, just as the LMP reflects the 

marginal effect of generation resources in each hour. LMP is the marginal value of both 

demand response and generation in any hour, regardless of whether it is morning or 

evening, daytime or nighttime, weekday or weekend.47 

20. We, nevertheless, seek comment on the need to compensate demand response 

acting as a resource in organized wholesale energy markets. Commenters may address 

retail prices, lack of dynamic prices, measurement and verification challenges, lack of 

real-time information sharing, and ineffective demand response program design; 

technological barriers, such as lack of advanced metering infrastructure and the high cost 

of some enabling technologies; and other barriers, such as lack of customer awareness 

and education. Federal Energy Regulatory Commission Staff, A National Assessment of 

Demand Response Potential (June 2009), found at http://www.ferc.gov/legal/staffrefports/06-09-demand-response.pdf. In compliance filings submitted by RTOs and ISOs 

and their market monitors pursuant to Order No. 719, as well as in responsive pleadings, 

parties have mentioned additional barriers, such as the inability of demand response 

resources to set LMP, minimum size requirements, and others. 

47 We note that in PJM, 17 percent of load reductions by demand response 

resources for that year occurred between the non-peak hours of 11 p.m. and 8 a.m. See

2008 State of the Market Report for PJM, Volume 2, Table 2-93 at 103, found at 

http://www.monitoringanalytics.com/reports/PJM_State_of_the_Market/2008/2008-sompjm-volume2.pdf. 
Docket Nos. RM10-17-000 and EL09-68-00 - 20 -

whether current compensation for demand response providers acting as a resource in the 

organized wholesale energy markets is adequately procuring demand response. We 

further solicit comment on alternative approaches to compensating demand response 

resources participating in organized wholesale energy markets, and the merit of those 

approaches in comparison to the one proposed here. In particular, we ask for comment 

on whether a reduction in consumption is comparable to an increase in electricity 

production for purposes of balancing supply and demand, and whether, therefore, demand 

response providers and generators should receive comparable compensation. We further 

seek comment on whether paying LMP to demand response resources is comparable 

compensation or is more or less than comparable to compensation paid to generation in 

the ISO and RTO energy markets. We also request comment on whether payment of 

LMP should apply to all hours, and, if not, the criteria that should be used for establishing 

the hours when LMP should apply. Additionally, we seek comment on whether requiring 

payment of LMP is appropriate across all ISOs and RTOs, or whether variations among 

ISOs and RTOs justify varying levels of demand response resource compensation. To 

that end, we further seek comment on whether the Commission should allow regional 

variations for an ISO or RTO that does not seek to compensate demand response 

resources participating in the organized wholesale energy market. 

21. Organized wholesale energy markets are evolving and, as such, the rules and 

regulations related to those markets will continue to evolve. This is no less so for 
Docket Nos. RM10-17-000 and EL09-68-00 - 21 -

demand response, as the markets, and the types of demand response participating in them, 

continue to evolve. Therefore, it may be necessary in the future for industry and the 

Commission to reassess the appropriate method for compensating demand response 

resources in organized wholesale energy markets.48 Accordingly, we also seek comment 

on whether, and under what circumstances, the Commission should conduct periodic 

reviews of demand response compensation and the criteria that should be used in making 

such assessments. 

22. With specific regard to the proposed regulatory text set forth below, we seek 

comments on whether terms such as “expected levels,” “price signals,” and “market 

prices” are sufficiently defined. 

23. Because we are addressing generically in this rulemaking proceeding the same 

issues raised in the PJM proceeding in Docket No. EL09-68-000, that docket is hereby 

terminated.49 The Commission will take administrative notice of the record in the PJM

 48 Indeed, the Commission’s proposed action in this proceeding is evidence of our 

continuing assessment of compensation for demand response resources. In PJM 

Interconnection, L.L.C., 121 FERC ¶ 61,315 (2007), the Commission rejected a 

complaint that PJM’s existing compensation for demand response (LMP minus the 

generation and transmission components of the retail rate) was unjust and unreasonable, 

finding that there was insufficient evidence at the time to make such a finding. As we 

have acquired more experience with the participation of demand response resources in 

the organized wholesale energy markets, we are concerned that compensation for demand 

response in PJM and other RTO and ISO markets may no longer be just and reasonable. 

49 See Michigan Pub. Power Agency v. Midwest Indep. Transmission Sys. 

(continued...) 
Docket Nos. RM10-17-000 and EL09-68-00 - 22 -

proceeding so that parties in that proceeding need not refile affidavits or other evidence 

introduced there. 

III. Information Collection Statement

24. The Office of Management and Budget (OMB) requires that OMB approve certain 

information collection and data retention requirements imposed by agency rules.50 

Therefore, the Commission is submitting the proposed modifications to its information 

collections to OMB for review and approval in accordance with section 3507(d) of the 

Paperwork Reduction Act of 1995.51

25. The Office of Management and Budget’s (OMB) regulations require approval of 

certain information collection requirements imposed by agency rules. Upon approval of 

a collection(s) of information, OMB will assign an OMB control number and an 

expiration date. Respondents subject to the filing requirements of a rule will not be 

penalized for failing to respond to these collections of information unless the collections 

of information display a valid OMB control number. 

26. The Commission is submitting these reporting requirements to OMB for its review 

and approval under section 3507(d) of the Paperwork Reduction Act. Comments are 

 

Operator, Inc., 128 FERC ¶ 61,268, at P 29 n.47 (2009) (Commission has discretion to 

decide when and where it will resolve an issue). 

50 5 CFR § 1320.11(b) (2009). 

51 44 U.S.C. § 3507(d) (2006). 
Docket Nos. RM10-17-000 and EL09-68-00 - 23 -

solicited on the Commission’s need for this information, whether the information will 

have practical utility, the accuracy of provided burden estimates, ways to enhance the 

quality, utility, and clarity of the information to be collected, and any suggested methods 

for minimizing the respondent’s burden, including the use of automated information 

techniques. 

Burden Estimate: The Public Reporting burden for the requirements contained in the 

NOPR is as follows: 

Data Collection 

Number of 

Respondents 

No. of 

Responses 

Hours Per 

Response 

Total Annual 

Hours 

FERC-516 

Transmission 

Organizations 

with Organized 

Electricity 

Markets 

 6 1 6 36 

Information Collection Costs: The Commission seeks comments on the costs to comply 

with these requirements. The Commission has projected the average annualized 

cost of all respondents to be the following: 36 hours @ $220 per hour = $7,920 for 

respondents. No capital costs are estimated to be incurred by respondents. 

Title: FERC-516 “Electric Rate Schedule Tariff Filings” 

Action: Proposed Collections. 

OMB Control No: 1902-0096. 

Respondents: Business or other for profit, and/or not for profit institutions. 
Docket Nos. RM10-17-000 and EL09-68-00 - 24 -

Frequency of Responses: One time to initially comply with the rule, and then on 

occasion as needed to revise or modify. 

27. Necessity of the Information: The information from FERC-516 enables the 

Commission to exercise its statutory obligation under Sections 205 and 206 of the FPA. 

FPA section 205 specifies that all rates and charges, and related contracts and service 

conditions for wholesale sales and transmission of energy in interstate commerce be filed 

with the Commission and must be “just and reasonable.” In addition, FPA section 206 

requires the Commission upon complaint or its own motion, to modify existing rates or 

services that are found to unjust, unreasonable, unduly discriminatory or preferential. 

The Commission needs sufficient detail to make an informed and reasonable decision 

concerning the appropriate level of rates, and the appropriateness of non-rate terms and 

conditions, and to aid customers and other parties who may wish to challenge the rates, 

terms, and conditions proposed by the utility. 

28. This proposed rule, if adopted, would amend the Commission’s regulations to 

obligate ISOs and RTOs to pay the market price for energy to demand response resources 

for demand reductions within each respective ISO and RTO region. Requiring ISOs and 

RTOs to pay the market price for energy to demand response resources for demand 

reductions in response to price signals will potentially reduce the market clearing price of 

electricity. The Commission has emphasized the importance of demand response as a 

vehicle for improving the competitiveness of organized wholesale electricity markets and 
Docket Nos. RM10-17-000 and EL09-68-00 - 25 -

ensuring supplies of energy at just, reasonable and not unduly discriminatory or 

preferential rates.52 

29. Internal review: The Commission has reviewed the requirements pertaining to 

organized wholesale electric markets and determined the proposed requirements are 

necessary to its responsibilities under sections 205 and 206 of the FPA. 

30. These requirements conform to the Commission’s plan for efficient information 

collection, communication and management within the energy industry. The 

Commission has assured itself, by means of internal review, that there is specific, 

objective support for the burden estimates associated with the information requirements. 

31. Interested persons may obtain information on the reporting requirements by 

contacting: Federal Energy Regulatory Commission, 888 First Street, NE, Washington, 

DC 20426 [Attention: Michael Miller, Office of the Executive Director, Phone: (202) 

502-8415, fax: (202) 273-0873, e-mail: michael.miller@ferc.gov]. Comments on the 

requirements of the proposed rule may also be sent to the Office of Information and 

Regulatory Affairs, Office of Management and Budget, Washington, D.C. 20503 

[Attention: Desk Officer for the Federal Energy Regulatory Commission], e-mail: 

oira_submission@omb.eop.gov. 

 52 Order No. 719 at P 16. 
Docket Nos. RM10-17-000 and EL09-68-00 - 26 -

IV. Environmental Analysis

32. The Commission is required to prepare an Environmental Assessment or an 

Environmental Impact Statement for any action that may have a significant adverse effect 

on the human environment.53 The Commission concludes that neither an Environmental 

Assessment nor an Environmental Impact Statement is required for this NOPR under 

section 380.4(a)(15) of the Commission’s regulations, which provides a categorical 

exemption for approval of actions under sections 205 and 206 of the FPA relating to the 

filing of schedules containing all rates and charges for the transmission or sale of electric 

energy subject to the Commission’s jurisdiction, plus the classification, practices, 

contracts and regulations that affect rates, charges, classifications, and services.54

V. Regulatory Flexibility Act Certification

33. The Regulatory Flexibility Act of 1980 (RFA)55 generally requires a description 

and analysis of final rules that will have significant economic impact on a substantial 

 53 Order No. 486, Regulations Implementing the National Environmental Policy 

Act, 52 Fed. Reg. 47,897, FERC Stats. & Regs. Regulations Preambles 1986-1990 ¶ 

30,783 (1987). 

54 18 CFR § 380.4(a)(15) (2009). 

55 5 U.S.C. § 601-12 (2000). 
Docket Nos. RM10-17-000 and EL09-68-00 - 27 -

 

number of small entities.56 ISOs and RTOs, not small entities, are impacted directly by 

this rule. 

34. California Independent System Operator Corp. (CAISO) is a non-profit 

organization comprised of more than 90 electric transmission-owning companies and 

generators operating in its markets and serving more than 30 million customers. 

35. New York Independent System Operator, Inc. (NYISO) is a non-profit 

organization that oversees wholesale electricity markets serving 19.2 million customers. 

NYISO manages a 10,775-mile network of high-voltage lines. 

36. PJM Interconnection, L.L.C. (PJM) is comprised of more than 450 members 

including power generators, transmission owners, electricity distributors, power 

marketers, and large industrial customers, serving 13 states and the District of Columbia. 

37. Southwest Power Pool, Inc. (SPP) is comprised of 50 members serving 4.5 million 

customers in eight states and has 52,301 miles of transmission lines. 

56 The RFA definition of “small entity” refers to the definition provided in the 

Small Business Act, which defines a “small business concern” as a business that is 

independently owned and operated and that is not dominant in its field of operation. See

15 U.S.C. § 601(3) (2000) (citing to section 3 of the Small Business Act, 15 U.S.C. § 632 

(2000)). The Small Business Size Standards component of the North American Industry 

Classification system defines a small utility as one that, including its affiliates, is 

primarily engaged in the generation, transmission, or distribution of electric energy for 

sale, and whose total electric output for the preceding fiscal years did not exceed 4 MWh. 

13 CFR § 121.202 (Sector 22, Utilities, North American Industry Classification System, 

NAICS) (2004). 
Docket Nos. RM10-17-000 and EL09-68-00 - 28 -

38. Midwest Independent Transmission System Operator, Inc. (Midwest ISO) is a 

non-profit organization with over 131,000 megawatts of installed generation. Midwest 

ISO has 93,600 miles of transmission lines and serves 15 states and one Canadian 

province. 

39. ISO New England, Inc. (ISO-NE) is a regional transmission organization serving 

six states in New England. The system is comprised of more than 8,000 miles of highvoltage transmission lines and several hundred generation facilities, of which more than 

350 are under ISO-NE’s direct control. 

40. The Commission believes this rule will not have a significant economic impact on 

a substantial number of small entities, and therefore no regulatory flexibility analysis is 

required. 

VI. Comment Procedures

41. The Commission invites interested persons to submit comments on the proposed 

regulatory text that commenters may wish to discuss. Comments are due 45 days after 

publication in the Federal Register. Comments must refer to Docket No. RM10-17-

000,57 and must include the commenter's name, the organization they represent, if 

applicable, and their address in their comments. 

 57 Because this NOPR terminates Docket No. EL09-68-000, comments should not 

refer to that proceeding. 
Docket Nos. RM10-17-000 and EL09-68-00 - 29 -

42. The Commission encourages comments to be filed electronically via the eFiling 

link on the Commission's web site at http://www.ferc.gov. The Commission accepts 

most standard word processing formats. Documents created electronically using word 

processing software should be filed in native applications or print-to-PDF format and not 

in a scanned format. Commenters filing electronically do not need to make a paper 

filing. 

43. Commenters that are not able to file comments electronically must send an 

original and 14 copies of their comments to: Federal Energy Regulatory Commission, 

Secretary of the Commission, 888 First Street, NE, Washington, DC 20426. 

44. All comments will be placed in the Commission's public files and may be viewed, 

printed, or downloaded remotely as described in the Document Availability section 

below. Commenters on this proposal are not required to serve copies of their comments 

on other commenters. 

VII. Document Availability

45. In addition to publishing the full text of this document in the Federal Register, the 

Commission provides all interested persons an opportunity to view and/or print the 

contents of this document via the Internet through FERC's Home Page 

(http://www.ferc.gov) and in FERC's Public Reference Room during normal business 

hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room 2A, 

Washington, DC 20426. 
Docket Nos. RM10-17-000 and EL09-68-00 - 30 -

46. From FERC's Home Page on the Internet, this information is available on 

eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft 

Word format for viewing, printing, and/or downloading. To access this document in 

eLibrary, type the docket number excluding the last three digits of this document in the 

docket number field. 

47. User assistance is available for eLibrary and the FERC’s web site during normal 

business hours from FERC Online Support at (202) 502-6652 (toll free at 1-866-208-

3676) or email at ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 

502-8371, TTY (202)502-8659. E-mail the Public Reference Room at 

public.referenceroom@ferc.gov. 

List of subjects in 18 CFR Part 35

 Electric power rates, Electric utilities, Reporting and recordkeeping requirements. 

By direction of the Commission. Commissioner Moeller is concurring in part and 

 dissenting in part with separate statement attached. 

( S E A L ) 

Nathaniel J. Davis, Sr., 

Deputy Secretary. 

 In consideration of the foregoing, the Commission proposes to amend Chapter I, 

Title 18 of the Code of Federal Regulations as follows: 
Docket Nos. RM10-17-000 and EL09-68-00 - 31 -

PART 35—FILING OF RATE SCHEDULES AND TARIFFS

1. The authority citation for Part 35 continues to read as follows: 

Authority: 16 U.S.C. § 791a-825r, 2601-2645; 31 U.S.C. § 9701; 42 U.S.C. 

§ 7101-7352. 

2. Amend § 35.28 as follows: 

Add a new paragraph (g)(1)(v). 

§ 35.28 Non-discriminatory open access transmission tariff. 

* * * * *

 (v) Demand response compensation in energy markets. Each Commissionapproved independent system operator or regional transmission organization that has a 

tariff provision permitting demand response resources to participate as a resource in the 

energy market by reducing consumption of electric energy from their expected levels in 

response to price signals must pay to those demand response providers, in all hours, the 

market price for energy for these reductions. 
UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

 

Demand Response Compensation in Organized 

Wholesale Energy Markets 

PJM Interconnection, L.L.C. 

Docket No.

 Docket No. 

RM10-17-000 

EL09-68-000 

(Issued March 18, 2010) 

 

MOELLER, Commissioner, concurring, in part and dissenting, in part: 

 As our country’s demand for energy increases, the reduction of energy usage 

through demand response programs will play a critical role in meeting our needs and it is 

my hope that this nascent industry will thrive and succeed. In the Energy Policy Act of 

2005, Congress established a policy to encourage the use of demand response by: (1) 

facilitating the deployment of technology to enable customers to participate in demand 

response programs; and (2) eliminating unnecessary barriers to demand response 

participation.1

 Even before this law was passed, this Commission supported similar 

policies in the organized electric markets by encouraging the use of price responsive 

demand during high priced energy periods.2

 Demand response is playing an increasingly critical role in our nation’s energy 

supply mix. Additional demand response has the potential to produce more efficient 

market outcomes, contribute to a cleaner environment,3

 result in lower costs to 

customers, and help to check market power since it provides a countervailing willingness 

 1

 Energy Policy Act of 2005, Pub. L. No. 109-58 § 1252(f), 119 Stat. 594 (2005). 

2 PJM Interconnection, L.L.C., 99 FERC ¶ 61,227, at 61,943 (2002), see also

Order No. 719 at P 16 (“Thus, enabling demand-side resources...improves the economic 

operation of electric power markets by aligning prices more closely with the value 

customers place on electric power.”) 

3

 A recent report by the National Research Council, Hidden Costs of Energy: 

Unpriced Consequences of Energy Production and Use, provides estimates of the cost 

associated with air pollution as the result of energy production.
Docket Nos. RM10-17-000 and EL09-68-000 -- 2 --

 

to reduce demand in the face of high prices.4

 With respect to prices, studies have 

shown that sometimes a small decrease in demand from demand response resources 

during peak periods can significantly reduce market prices. In sum, the benefits that 

demand response resources can bring to the energy markets are proven and significant. 

 The initial success of demand response has resulted in a steady maturation of the 

demand response industry. However, as the industry continues to mature, we must 

ensure that our policies are properly tailored to guide the development of demand 

response in a manner that will result in economically-efficient outcomes. Moving too 

quickly to reach a desired result can result in unintended consequences – and I believe 

that today’s decision to propose a standard payment could have unintentional effects on 

both demand response participation and the efficient operation of the organized markets 

over the longer term. 

In today’s notice of proposed rulemaking (NOPR), the majority concludes that the 

Commission should require a standard payment to compensate demand response 

resources. Specifically, the majority’s proposed outcome would be that these resources 

are paid the market price (i.e., the locational marginal price or “LMP”) for energy 

reductions in all 8,760 hours of the year. This determination is followed by questions 

such as whether other compensation designs could also work; questions that I believe 

would have been more appropriately asked prior to establishing this NOPR.5

 For that 

reason, I believe that a preliminary issuance (such as a Notice of Inquiry) should have 

been established to collect and analyze the evidence in advance of initiating a formal 

rulemaking proceeding. 

 

While the majority claims that it is “concerned that compensation for demand 

response in PJM and other RTO and ISO markets may no longer be just and reasonable”, 

the NOPR lacks a thorough discussion of the evidence that they relied upon to 

substantiate their concerns.6

 The NOPR also lacks a sufficient explanation of the 

(continued...) 

4 California Indep. Sys. Operator Corp., 116 FERC ¶ 61,274, at P 689. 

5

 To the extent that this NOPR asks questions to determine whether the proposed 

rule is just and reasonable, I concur. 

6

 NOPR at n. 48. In support of the conclusion that compensation may no longer be 

just and reasonable, the preamble provides an example involving PJM’s Economic Load 

Response Program and the drop of settled demand reductions experienced after the 

subsidy payments expired per the terms of PJM’s tariff. NOPR at P 10. While the cited 

level of reduction is a fact, the PJM market monitor stated that “[w]hile the removal of 
Docket Nos. RM10-17-000 and EL09-68-000 -- 3 --

 

“experience” that FERC has recently gained that would otherwise support the 

conclusion that the organized electric markets “fail to compensate demand response at 

levels that reflect the marginal value of the resource being used by the RTO or ISO to 

balance supply and demand.”7

To the contrary, the record in Docket No. EL09-68-000 shows wide disagreement 

in the industry regarding the issue of demand response compensation. In that proceeding, 

state utility commissions8

, the grid operator, industry economists, and the market 

participants all reached various conclusions regarding the question of how to compensate 

demand response resources in PJM.9

 In light of such rigorous debate, I am not sure if the 

the incentive program, effective November 2007, may have reduced participation, the 

exact role of the elimination of the incentive program is not known because there were 

changes to other key factors which directly impact participation.” Citing Monitoring 

Analytics, Barriers to Demand Side Response in PJM, at 22 (July 1, 2009). More 

recently, the PJM market monitor recognized that between 2008 and 2009, “[t]here were 

many factors contributing to the lower levels of participation and lower revenues in the 

Economic Program, including lower price levels in 2009, lower load levels, and 

improved measurement and verification.” Notably, while payments from the Economic 

Program have fallen substantially since 2007, capacity revenue for demand response has 

increased significantly (rising 114% to $303 million from 2008 to 2009.) Citing 

Monitoring Analytics, State of the Market Report for PJM, at 111 (March 11, 2010). 

7

 NOPR at P 13. 

8

 Compare the position of the Indiana Utility Regulatory Commission (i.e., LMP 

less the generation portion of retail rates (LMP-G) is an accepted indication of costeffectiveness) with the position taken by the New Jersey Board of Public Utilities and the 

District of Columbia Public Service Commission (i.e., compensation for demand 

response should be based solely on LMP). Comments filed in Docket No. EL09-68-000. 

9

 While there appears to be no disagreement that the correct price signal for all 

customers is the LMP, the debate centers on whether demand response resources should 

be paid the LMP or should realize the value of LMP if they choose to reduce demand. 

Additionally, at certain times, the LMP can become negative, meaning that generators 

must pay into the market to the extent they generate power. Should demand response 

resources likewise be required to pay into the market during negative LMP events, or 

should they be exempt?
Docket Nos. RM10-17-000 and EL09-68-000 -- 4 --

 

Commission has a sustainable rationale to support a finding that the proposed rule 

is just and reasonable and that the existing compensation methods (that have been 

approved by this Commission) are no longer just and reasonable. 

 In fact, only recently did the Commission issue an order that not only sustained the 

manner by which PJM compensates demand response resources but also encouraged PJM 

and its stakeholders to identify and analyze issues to improve their demand response 

program.10 Subsequently, PJM filed a detailed report explaining that while the 

stakeholder process did not yield a consensus position, the PJM Board moved forward 

and developed a compromise solution that was designed to strengthen its demand 

response markets.11 In lieu of evaluating the merits of the proposal approved by PJM’s 

Board, the NOPR terminates the PJM docket and directs PJM and its stakeholders to 

focus on whether demand response resources should be paid the market price – a question 

that has undoubtedly been analyzed, addressed and debated at numerous stakeholder 

meetings. 

Since today’s NOPR does not sufficiently explain the need for a uniform 

compensation approach, I am troubled by the decision to terminate PJM’s individual 

proceeding. If approved, PJM’s efforts toward developing a compromise solution for its 

market would have likely resulted in additional demand response participation and its 

associated benefits. However, with this NOPR’s issuance, PJM and the other RTOs must 

now refrain from making changes to its demand response compensation rules pending the 

outcome of the rulemaking proceeding. The NOPR may also discourage some emerging 

organized markets from continuing to evolve toward the LMP model, as well as 

discourage some non-organized regions from seriously considering moving toward a 

market structure. 

Ultimately, I want demand response to thrive and succeed in all the energy 

markets.12 However, there are only so many policy decisions and rulemakings that this 

(continued...) 

10 PJM Industrial Customer Coalition v. PJM Interconnection, L.L.C., 121 FERC 

¶ 61,315, at P 29 (2007) (Wellinghoff and Kelly, Comm’rs, dissenting). 

11 PJM did note that the concept of paying LMP-G received considerable support 

and “conservatively could be said to have garnered at least a three-quarters majority 

approval.” See PJM Supplemental Report in Docket No. EL09-68-000 at 24-25. 

12 My concern here goes to highlight the differences between regions with 

competitive wholesale markets and those that consist of largely bilateral market 

structures. By imposing a uniform compensation requirement, this proposed rulemaking 
Docket Nos. RM10-17-000 and EL09-68-000 -- 5 --

 

Commission can make to encourage its development. As mentioned in the preamble, 

the primary barrier to increased demand response is the disconnect between retail and 

wholesale prices and the remedy resides at the retail level where there is a lack of dynamic 

pricing. The approach embraced in the NOPR may also lead to a situation where residential 

ratepayers could be subsidizing other classes of service while unable to participate 

themselves in demand response programs. Absent attention to these issues, it will be 

difficult for any proposal to place generation and demand response on a precisely level 

playing field. 

Until then, this Commission must review what options it has available without 

resorting to policies that would adversely enable the short-term development of demand 

response at the expense of its longer-term success. In closing, I believe that demand 

response programs have great potential to enhance the organized energy markets and I 

look forward to their continued development. I am concerned, however, that a one-sizefits-all approach could result in uneconomic outcomes that ultimately set back the future 

development of demand response. 

 _______________________ 

 Philip D. Moeller 

 Commissioner 

could further exacerbate bifurcated approach toward national policy: entities in a 

competitive wholesale market must comply with increasingly burdensome requirements 

while entities operating in bilateral markets are often free from requirements that 

otherwise advance national policy goals.