ELECTRICITY 

MARKETS

Demand-Response 

Activities Have 

Increased, but FERC 

Could Improve Data 

Collection and 

Reporting Efforts

Report to Congressional Requesters

March 2014

GAO-14-73

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-73, a report to 

congressional requesters

March 2014

ELECTRICITY MARKETS

Demand-Response Activities Have Increased, but 

FERC Could Improve Data Collection and Reporting

Efforts 

Why GAO Did This Study

Electricity demand fluctuates throughout

the day and year and, as GAO has 

reported, electricity is generated first at 

U.S. power plants with the lowest 

operating costs, and, as demand rises, at 

more costly plants. Prior to being sold to 

retail consumers such as households 

and businesses, electricity is traded in 

wholesale markets. Regulation of 

electricity markets is divided; states 

oversee retail markets, and FERC 

oversees wholesale markets. In 2004, 

GAO reported on the benefits of 

encouraging consumers to reduce 

demand when the cost to generate 

electricity is high. These activities are 

known as “demand-response activities,” 

which can reduce the costs of producing 

electricity, improve market functions, and 

enhance reliability.

GAO was asked to examine demandresponse activities. This report provides 

an update since 2004 and discusses: (1) 

federal efforts to facilitate demandresponse activities, (2) FERC efforts to 

collect and report data on demandresponse activities, (3) changes in the 

extent of demand-response activities, 

and (4) key benefits and challenges of 

current efforts. GAO reviewed 

documents and conducted interviews

with government officials and industry 

stakeholders with demand-response 

expertise. 

What GAO Recommends

GAO recommends FERC review the 

scope of its data collection and improve

the transparency of its reporting efforts. 

In commenting on a draft of this report, 

FERC stated that it would take the 

report’s recommendations and findings 

under advisement. GAO believes in the 

importance of fully implementing these 

recommendations. 

What GAO Found

Since 2004, the federal government has made efforts to facilitate demand-response

activities, including expanding their use in wholesale electricity markets. Among 

these efforts, the Federal Energy Regulatory Commission (FERC) issued regulatory 

orders affecting Regional Transmission Organizations (RTO)—entities that operate 

the transmission system and administer wholesale markets in some parts of the 

country. For example, FERC issued orders approving RTO rules for quantifying the 

extent of demand-response activities and compensating consumers for their 

demand-response activities.

FERC collects and reports data on demand-response activities in accordance with

the Energy Policy Act of 2005, but these efforts have limitations. Electricity markets 

and demand-response activities have changed since FERC began collecting and 

reporting this data in 2006, but FERC has not reviewed the scope of its efforts to 

determine whether they could better reflect changes in electricity markets and

demand-response activities. For example, FERC has reported that the limited 

number of retail consumers paying rates that vary with the cost of serving them is a 

barrier to expanding demand-response activities, but its report provides limited data 

on the number of consumers doing so. GAO has reported that evaluation of 

programs or efforts with a specific focus—such as FERC’s demand-response data 

collection efforts—can play a key role in management and oversight. FERC, in some 

cases, adjusts the data it collects before making them available to the public—using 

its judgment to improve the data’s consistency, for example—but does not fully 

document these adjustments. Best practices for data management advise that data 

modifications be documented. By not addressing these limitations, FERC is missing 

opportunities to make its data more informative and transparent to users for analysis 

of trends in demand-response activities and the extent to which progress has been 

made in addressing barriers. 

Since GAO’s 2004 report, FERC data show that the extent of demand-response

activities has increased, with demand-response activities in wholesale and retail 

markets more than doubling from a total of 29,653 megawatts (MW) of potential 

reduction in peak demand in 2005 to more than 66,350 MW in 2011—about 8.5 

percent of total peak demand. Demand-response activities in retail markets have

increased 81 percent from a reported 20,754 MW of potential reduction in 2005 to a 

reported 37,543 MW in 2011. In wholesale markets, demand-response activities

more than tripled from 2005 through 2011—increasing from 8,899 MW of potential 

reduction in 2005 to 28,807 MW of potential reduction in 2011—but the extent of 

demand-response activities has varied by RTO region. 

According to stakeholders, current demand-response efforts provide benefits for 

consumers, including increasing reliability and lowering prices, but these efforts also 

pose a number of challenges for wholesale markets. For example, FERC’s efforts to 

encourage demand-response activities in the markets it oversees have made these 

markets more complex by introducing administrative functions that, according to 

stakeholders, have led to challenges. Challenges include the need to develop 

estimates of the amount of electricity a consumer would have used in order to 

quantify the reduction in electricity use from demand-response activities. FERC has 

taken some steps to address these challenges, but it is too soon to tell whether these 

steps will be effective.

View GAO-14-73 For more information,

contact Frank Rusco at (202) 512-3841 or 

ruscof@gao.gov. 
Page i GAO-14-73 Electricity Markets 

Letter 1 

Background 6

The Federal Government Has Made Efforts to Facilitate 

Demand-Response Activities, Including Expanding Their 

Use in Wholesale Markets 15

FERC Collects Data and Reports on Demand-Response 

Activities, but These Efforts Have Limitations 22

Demand-Response Activities Have Increased Overall, but

Their Characteristics Have Varied 30

Demand-Response Efforts Have Resulted in Benefits, but 

Current Efforts Continue to Pose Challenges in Wholesale 

Markets 39

Conclusions 50

Recommendations for Executive Action 51

Agency Comments and Our Evaluation 51

Appendix I Objectives, Scope, and Methodology 53

Appendix II Stakeholders Interviewed 57

Appendix III Comments from the Federal Energy Regulatory Commission 59

Appendix IV GAO Contact and Staff Acknowledgments 60

Tables

Table 1: Three Key FERC Orders Related to Demand-Response 

Activities 21

Table 2: Examples of Operator-Initiated Approaches 32

Table 3: Examples of Consumer-Initiated Approaches 34

Figures

Figure 1: Functions of the Electricity Industry 7

Contents
Page ii GAO-14-73 Electricity Markets 

Figure 2: United States Regional Transmission Organizations 

(RTO) 12

Figure 3: Regional Transmission Organization Demand-Response 

Capacity as a Percentage of Total System Capacity 

(2006 – 2012) 36

Figure 4: Demand-Response Resources in Regional Transmission 

Organization Regions in 2011 Used to Provide Ancillary 

Services, Capacity, and Energy, Measured in Megawatts 

of Reported Potential Reduction in Peak Demand 38

Abbreviations

DOE Department of Energy

EIA Energy Information Administration

EPA Environmental Protection Agency

ERCOT Electric Reliability Council of Texas

FERC Federal Energy Regulatory Commission

GW gigawatt

ISO Independent System Operator

MW megawatt

NERC North American Electric Reliability Corporation

PURPA Public Utility Regulatory Policies Act of 1978

RTO Regional Transmission Organization

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-14-73 Electricity Markets 

441 G St. N.W.

Washington, DC 20548

March 27, 2014

The Honorable Thomas R. Carper

Chairman

Committee on Homeland Security and Governmental Affairs

United States Senate

The Honorable Susan M. Collins

United States Senate

The Honorable Peter Welch

House of Representatives

Electricity is vital to the nation’s economy and central to the lives of all 

Americans. Businesses—from large industrial manufacturers to small 

businesses—rely on electricity to produce trillions of dollars in products 

and services. Residential consumers rely on electricity to power 

household appliances and other devices important to their daily lives.1

Electricity is supplied through a complex network of power plants and 

power lines—the electricity grid—managed by utility companies and other 

operators. Since electricity cannot be easily stored, power plants’ 

electricity output must be matched precisely with demand, which varies 

significantly depending on the time of day and year. To maintain a reliable 

supply of electricity, operators of the electricity grid take steps to ensure 

that power plants will be available to generate electricity when needed. In 

doing so, they typically ensure availability exceeds estimated demand so 

that any unexpected increases in demand or power plant outages can be 

Given its importance, the price and reliability of electricity can have 

substantial impacts on consumers and the broader economy.

 

1

Electricity consumers are divided into four groups: industrial, commercial, residential, and 

other. According to the Energy Information Administration (EIA), the industrial sector 

encompasses manufacturing, agriculture, mining, and construction—and a wide range of 

activities, such as processing and assembly, space conditioning, and lighting. According 

to the EIA, the commercial sector consists of businesses, institutions, and organizations 

that provide services, encompassing many different types of buildings and a wide range of 

activities. Examples of commercial sector facilities include schools, stores, office buildings, 

and sports arenas. According to EIA, the residential sector includes households and 

excludes transportation. In the residential sector, energy is used for heating, cooling, 

lighting, water heating, and many other appliances and equipment. Other includes uses 

not captured in the other three categories, including transportation.
 

Page 2 GAO-14-73 Electricity Markets 

accommodated without consumers losing access to electricity. As 

demand for electricity varies throughout the day and year, grid operators 

respond by continually increasing or decreasing the amount of electricity 

that they call upon power plants to generate. As we have previously 

reported, the cost of generating electricity varies, and grid operators 

generally rely on plants that are the least costly to operate first and most 

often and plants that are the most costly to operate last and least often.2

Responsibility for regulating electricity is divided between states and the 

federal government. Most electricity consumers are served by retail 

markets that are regulated by the states, generally through state public 

utility commissions or equivalent organizations. As the primary regulator 

of retail markets, state commissions approve many aspects of utility 

operations, such as the siting and construction of new power plants, as 

well as the prices consumers pay and how those prices are set.

Because the plants used to meet the highest levels of demand are 

generally much more expensive to operate, there is significant variation in 

the costs of serving consumers throughout the day and year.

3 In 2004, 

we reported that most retail consumers paid electricity prices that 

reflected the average cost of serving them for an extended period.4

 

2

GAO, Electricity Markets: Consumers Could Benefit from Demand Programs, but 

Challenges Remain, 

Such 

extended periods could be a year or longer. Prior to being sold to these 

retail consumers, such as households and businesses, electricity is 

bought, sold, and traded in wholesale electricity markets by companies 

that own power plants, as well as utilities and other companies that sell 

electricity directly to retail consumers. Wholesale buyers may purchase 

electricity at prices that vary throughout the day and year and are largely 

determined by the interaction of supply and demand. Wholesale electricity 

markets are regulated by the federal government. The Federal Energy 

Regulatory Commission (FERC), which oversees wholesale electricity 

sales, among other things, has statutory responsibility to ensure that 

wholesale electricity rates are “just and reasonable” and not “unduly 

GAO-04-844 (Washington, D.C.: Aug. 13, 2004).

3

The price consumers pay for electricity is often a combination of rates determined by 

regulators and prices determined by markets. Rates are generally approved by regulators 

and set to recover the cost of providing a service plus a rate-of-return. Prices are marketbased, determined based on the interaction of supply and demand. For the purposes of 

this report, we generally use “prices” to refer to both rates and prices, except when 

specifically discussing FERC’s oversight authority.

4

GAO-04-844. 
 

Page 3 GAO-14-73 Electricity Markets 

discriminatory or preferential.”5 Historically, FERC met this responsibility 

by approving electricity rates based on utilities’ costs of production plus a 

rate-of-return that it determined to be reasonable. Beginning in the late 

1990s, FERC took a series of significant steps to restructure the 

wholesale electricity markets to increase the role of competition—market 

forces of supply and demand—in setting prices.6

We previously reported that, while regulation of retail and wholesale 

markets is divided, these markets are interconnected and operationally 

joined, with generation and consumption of electricity separated by 

milliseconds.7

 

5

FERC is also responsible for regulating transmission of electricity in interstate commerce 

by privately owned utilities. FERC does not regulate transmission or wholesale electricity 

sales in most of the state of Texas because Texas’ grid is separate from the two other 

U.S. grids. In addition, FERC does not regulate transmission or wholesale electricity sales 

in Alaska or Hawaii because of their geographical isolation.

We also reported that encouraging consumers to change 

their demand for electricity in response to changes in varying prices and 

the availability of other incentives can offer cost savings and operating

advantages over relying solely upon increases in the production of 

electricity to meet demand. These activities are collectively known as 

“demand-response activities,” and they can be integrated into both retail 

and wholesale markets. For example, to encourage retail consumers to 

reduce demand when costs are high, such as on summer afternoons, 

utilities may charge prices that vary throughout the day and year to reflect 

the costs of serving consumers. Alternatively, utilities may provide 

consumers with financial or other incentives to install technologies on 

certain equipment—such as pool pumps, air conditioners, and water 

heaters—that allow the utility to directly lower electricity consumption of 

these devices during times of high demand. Similarly, in wholesale 

markets, grid operators may provide compensation to consumers for 

6

These steps included the development of the following two orders: (1) Order 888, 

Promoting Wholesale Competition Through Open Access Non-discriminatory 

Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities 

and Transmitting Utilities. Apr. 24, 1996, and (2) Order 2000, Regional Transmission 

Organizations. Dec. 20, 1999.

7

GAO-04-844. GAO, Electricity Restructuring: 2003 Blackout Identifies Crisis and 

Opportunity for the Electricity Sector, GAO-04-204 (Washington, D.C.: Nov. 18, 2003). 
 

Page 4 GAO-14-73 Electricity Markets 

actions they take to use less electricity than expected during periods of 

peak demand.8

Our August 2004 report found that demand-response activities could 

benefit consumers by improving market functions and enhancing the 

reliability of the electricity system (e.g., the ability to meet consumers’ 

electricity demand).9 We also found that such demand-response activities 

could encourage consumers to reduce demand when the cost to generate 

electricity is high. However, we highlighted three main barriers to 

expanding demand-response activities: (1) state regulations that shield 

consumers from short-term variations in the cost of producing electricity 

or wholesale prices; (2) the absence of equipment required for 

participation in demand-response programs at consumers’ sites, such as 

advanced meters that can measure electricity consumption on a more 

frequent basis;

10 and (3) consumers’ limited awareness of demandresponse programs and their potential benefits. In 2005, through the 

Energy Policy Act, Congress encouraged time-based pricing of 

electricity—prices that vary with the cost of serving electricity 

consumers—and other forms of demand-response activities.11

 

8 Grid operators may provide compensation for demand-response activities to a wide 

range of market participants, including consumers and others. Throughout this report, we 

use the term “consumers” to capture the range of market participants including the 

consumers that reduce demand, as well as others. 

The act 

also provides that it is the policy of the United States that the deployment 

of technology and devices that enable electricity consumers to participate 

in such pricing and demand-response programs are to be facilitated, and 

that unnecessary barriers to expanding demand-response activities in 

electricity markets are to be eliminated. In addition, the act required that 

FERC prepare and publish an annual report that assesses demandresponse resources in the United States. Additionally, we reported in 

2012 that 2 to 12 percent of coal-fueled capacity may be retired and other 

plants may be modified to reduce environmental impacts and that 

9

GAO-04-844. 

10 In general, traditional electric meters measure electricity consumption on an ongoing 

basis, but the measurements may only be captured monthly to calculate bills for 

consumers. Advanced meters are capable of measuring and recording consumption on a 

more frequent basis, hourly or less.

11Pub. L. No. 109-58, § 1252(f), 119 Stat. 594, 966 (Aug. 8, 2005).
 

Page 5 GAO-14-73 Electricity Markets 

demand-response could provide a way to mitigate potential reliability 

impacts of these actions.12

In this context, you asked us to examine U.S. efforts to expand demandresponse activities. This report provides an update on the status of 

demand-response activities since we reported on them in 2004 and 

assesses: (1) the federal government’s efforts to facilitate demandresponse activities; (2) FERC efforts to collect and report data on 

demand-response activities; (3) changes, if any, in the extent of demandresponse activities in retail and wholesale markets; and (4) key benefits 

and challenges, if any, of current demand-response efforts.

 

To do this work, we reviewed federal demand-response policies and 

interviewed officials from FERC, the Environmental Protection Agency 

(EPA), and the Department of Energy (DOE). In addition, we reviewed 

FERC demand-response data about how overall levels of demandresponse activities have changed over time. We also analyzed data from 

a 2012 FERC survey of utility demand-response activities to identify the 

primary demand-response approaches in use at the retail level. To 

assess the reliability of these data, we interviewed FERC officials and 

performed electronic testing of the data. We found some elements of the 

data to be sufficiently reliable for our purposes. In other cases, we were 

unable to determine the quality of the data and, therefore, did not include 

related analyses in our report. In addition, we reviewed current literature, 

including reports about demand-response activities. We also interviewed 

a nonprobability sample of 37 electricity stakeholders with expertise on 

demand-response activities from trade associations and public interest 

organizations, academics and consultants, state government officials, 

industry representatives, and grid operators. We selected these five types 

of stakeholders to represent different perspectives on demand-response 

activities. Within each stakeholder group, we spoke with a diverse set of 

stakeholders to maintain balance on key issues—for example, their views 

on how to compensate those who participate in demand-response 

activities. Because this was a nonprobability sample, the information and 

perspectives that we obtained from the interviews are not generalizable to 

similar groups of stakeholders. We also interviewed an additional 5 

stakeholders who had specialized knowledge about certain aspects of the 

 

12 GAO, EPA Regulations and Electricity: Better Monitoring by Agencies Could Strengthen 

Efforts to Address Potential Challenges, GAO-12-635 (Washington, D.C.: July 17, 2012).
 

Page 6 GAO-14-73 Electricity Markets 

electricity industry relevant to our study—for example, experience 

evaluating the competitiveness of the FERC-regulated wholesale 

markets. A more complete discussion of our objectives, scope, and 

methodology is provided in appendix I of this report.

We conducted this performance audit from September 2012 to March 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

This section describes (1) the balancing of supply and demand in regional 

electricity systems, (2) restructuring of the electricity sector and the 

expanding role of competition in markets, and (3) two key demandresponse approaches.

The electricity industry includes four distinct functions: generation, 

transmission, distribution, and system operations (see fig. 1). Electricity 

may be generated at power plants by burning fossil fuels; through nuclear 

fission; or by harnessing wind, solar, geothermal, or hydroenergy. Once 

electricity is generated, it is sent through the electricity grid, which 

consists of high-voltage, high-capacity transmission systems to areas 

where it is transformed to a lower voltage and sent through the local 

distribution system for use by business and residential consumers. 

Throughout this process, a grid operator, such as a local utility, must 

constantly balance the generation and consumption of electricity. To do 

so, grid operators monitor electricity consumption from a centralized 

location using computerized systems and send minute-by-minute signals 

to power plants to adjust their output to match changes in the demand for 

electricity.

Background

Balancing Supply and 

Demand in Regional 

Electricity Systems
 

Page 7 GAO-14-73 Electricity Markets 

Figure 1: Functions of the Electricity Industry

Balancing the generation and consumption of electricity is challenging for 

grid operators because consumers use sharply different amounts of 

electricity through the course of the day and year. Although there are 

regional variations, demand typically rises through the day and reaches 

its highest point—called the peak—in late afternoon or early evening. In 

some parts of the country, average hourly demand can be up to twice as 

high during late afternoon and early evening as it is during the middle of 
 

Page 8 GAO-14-73 Electricity Markets 

the night and early morning hours. In addition to these daily variations in 

demand, electricity demand varies seasonally, mainly because airconditioning during the summer accounts for a large share of overall 

electricity usage in many parts of the country. In some areas, peak usage 

can be twice as high during the summer as it is during the winter.

The power plants that grid operators use to meet this varying demand 

include baseload plants and peakers. Baseload plants are generally the 

most costly to build but have the lowest hourly operating costs.13 In 

general, grid operators maximize the amount of electricity supplied by the 

baseload plants, which are often used continuously for long periods of 

time. As demand rises through the day and through the year and exceeds 

the amount of electricity generation that can be delivered from baseload 

power plants, grid operators increasingly rely on electricity supplied by 

peakers. Peakers are usually less costly to build but more costly to 

operate.14 As grid operators’ reliance on peakers rises, the cost of 

meeting demand can increase considerably. For example, the wholesale 

price of electricity can rise almost 10-fold in the late afternoon and early 

evening, when demand is at its highest and more peakers are being 

utilized, compared to nighttime and early morning, when demand is at its 

lowest and few, if any, peakers are being utilized. Peak periods are 

generally short and account for only a few hours per day and, overall, a 

small percentage of the hours during a year, but can significantly 

contribute to the overall costs of serving consumers. According to a 2012 

report by DOE’s Lawrence Berkeley National Laboratory, spikes in 

demand during peak periods have a significant economic impact.15

 

13The types of technologies used by baseload power plants can vary by region but often 

include plants using coal, nuclear, hydroelectric, or combined-cycle natural gas 

technologies—units that utilize a combustion turbine in conjunction with a steam turbine to 

produce electricity. 

This 

report estimates that, in many electricity systems, 10 percent or more of 

the costs of generating electricity are incurred to meet levels of demand 

that occur less than 1 percent of the time.

14The types of technologies used by peaker power plants can vary by region but often 

include plants using natural gas combustion turbines. 

15DOE, Ernest Orlando Lawrence Berkeley National Laboratory, and EnerNOC, 

Addressing Energy Demand through Demand Response: International Experiences and 

Practices (June 2012). This work was also supported by two authors from EnerNOC, a 

company in the demand-response industry.
 

Page 9 GAO-14-73 Electricity Markets 

Maintaining a reliable supply of electricity is a complex process requiring 

the grid operator to coordinate three broad types of services as follows:

• Energy. Operators schedule which power plants will produce 

electricity—referred to as energy scheduling—to maintain the balance 

of electricity generation and consumption. As a general rule, grid 

operators will schedule the least costly baseload power plants first 

and run them longest, and schedule the most costly peaker plants last 

and run them less often.

• Capacity. Operators procure capacity—long-term commitments to 

provide specific amounts of electricity generation to ensure that there 

will be sufficient electricity to reliably meet consumers’ expected future 

electricity needs. Procuring capacity may involve operators of power 

plants committing that existing or new power plants will be available to 

generate electricity, if needed, at a particular future date. To provide 

for potential unexpected increases in demand or any problems that 

prevent some power plants from providing electricity or transmission 

lines from delivering electricity as expected, the commitments to 

provide electricity may exceed expected demand by a specified 

percentage or safety margin.

• Ancillary services. Operators procure several ancillary services to 

maintain a reliable electricity supply. Ancillary services encompass 

several highly technical functions required for grid operators to ensure 

that electricity produced can be delivered and used by consumers. 

Some ancillary services help ensure that electricity can be delivered 

within technical standards—for example, at the right voltage and 

frequency—to keep the grid stable and be useful for consumers who 

may have equipment that needs to operate at specific voltage and 

frequency levels.

Over the last 2 decades, some states and the federal government have 

taken steps to restructure the regulation of their electric systems with the 

goals of increasing the roles of competition in markets, lowering prices, 

and giving consumers access to a wider array of services. The electricity 

industry was historically characterized by integrated utilities that oversaw 

the four functions of electricity service—generation, transmission, 

distribution, and system operations—in a monopoly service territory in 

exchange for providing consumers with electricity at regulated retail 

prices. In certain parts of the country, states and the federal government 

restructured the electricity industry to one in which the wholesale price for 

electricity generation is determined largely by supply and demand in 

Restructuring of the 

Electricity Sector and the 

Expanding Role of 

Competition and Markets
 

Page 10 GAO-14-73 Electricity Markets 

competitive markets. More specifically, historically, at the retail level, 

integrated monopoly utilities provided consumers with electricity at 

regulated prices, and state regulators generally set retail electricity prices 

based on a utility’s cost of production plus a fair rate of return on the 

utility’s investment in its infrastructure, including power plants and power 

lines. However, beginning in the late 1990s, some states chose to 

restructure the retail markets they oversee to allow the price of electricity 

to be determined largely by supply and demand in competitive markets. In 

parts of the country where electricity markets have restructured, new 

entities called retail service providers compete with existing utilities to 

provide electricity to consumers by offering electricity plans with differing 

prices, terms, and incentives.

At the wholesale level, FERC is required by law to ensure that the rates it 

oversees are “just and reasonable” and not “unduly discriminatory or 

preferential,” among other things.16 Prior to restructuring the wholesale 

electricity markets in the late 1990s, FERC met this requirement by 

approving rates for transmission and wholesale sales of electricity in 

interstate commerce based on the utilities’ costs of production plus a fair 

rate of return on the utilities’ investment.17

As part of this restructuring process, FERC also encouraged the voluntary 

creation of new entities called Regional Transmission Organizations 

(RTO) to manage regional networks of electric transmission lines as grid 

operators—functions that, in these areas, had traditionally been carried 

After restructuring wholesale 

electricity markets, FERC continued to develop transmission rates in this 

same way. In addition, FERC provided authority for many entities—for 

example, independent owners of power plants—to sell electricity at prices 

determined by supply and demand where FERC determined that the 

markets were sufficiently competitive or that adequate procedures were in 

place to mitigate the effect of companies with a large market share and 

the ability to significantly control or affect prices in the markets. As a 

result, these entities can now compete with existing utilities and one 

another to sell electricity in wholesale markets.

 

16Sections 205 and 206 of the Federal Power Act, 16 U.S.C. §§ 824d -824e.

17Under section 205 of the Federal Power Act, FERC oversees rates for the transmission 

of electric energy in interstate commerce and the sale of electric energy at wholesale in 

interstate commerce. 16 U.S.C. § 824.
 

Page 11 GAO-14-73 Electricity Markets 

out by local utilities.18 Figure 2 indicates the location of major RTOs that 

have developed in certain regions of the United States. As grid operators, 

RTOs are responsible for managing transmission in their regions, which 

includes establishing and implementing rules and pricing related to 

transmission, as well as considering factors, such as weather conditions 

and equipment outages, that could affect the reliability of electricity supply 

and demand.19

 

18Prior to the creation of RTOs, FERC approved the creation of entities called 

Independent System Operators (ISO). ISOs perform many similar functions to RTOs and 

for the purposes of this report, we refer to all ISOs and RTOs as “RTOs”. However, many 

RTOs that originally took on names that include “ISO” have maintained them. 

19The North American Electric Reliability Corporation (NERC), which has been designated 

by FERC as the principal reliability authority for the United States, oversees the reliability 

of key parts of the U.S. electricity grid, including establishing mandatory standards of 

reliability. RTOs, utility grid operators, and other participants in the electricity markets must 

take various actions to comply with these standards.
 

Page 12 GAO-14-73 Electricity Markets 

Figure 2: United States Regional Transmission Organizations (RTO)

Note: This graphic reflects RTO borders based on available information as of February 2014, but 

these borders may change as territory is added or subtracted from RTO regions. The transmission 

grid that the Electric Reliability Council of Texas (ERCOT) administers is located solely within the 

state of Texas and constitutes a separate grid from the two other main grids in the continental United 

States. As a result, ERCOT is largely unregulated by FERC and is instead subject to oversight by the 

Public Utility Commission of Texas. ERCOT performs similar functions as the RTOs in this map, 

including managing Texas’ transmission system and overseeing wholesale sales of electricity.

Like other grid operators, such as utilities, RTOs take steps to schedule 

and procure energy, capacity, and ancillary services. RTOs often do so 

using the three broad types of markets they manage—energy markets; 

capacity markets; and markets for several different ancillary services, 

including voltage support and frequency support. In the energy markets, 

for example, sellers—such as owners of power plants—place offers with 

RTOs to supply an amount of electricity at a specific price. Potential 
 

Page 13 GAO-14-73 Electricity Markets 

buyers of this electricity, such as retail service providers, also place bids 

with RTOs defining their willingness to pay for it. RTOs periodically—

hourly, for example—“stack” the offers to supply electricity from lowest 

offered price to highest until the RTO estimates that it has sufficient 

electricity to meet the total demand. The market clearing price, or the 

highest supply bid needed to satisfy the last unit of demand, is paid for 

each unit of electricity produced for that time period. Regions with RTOs 

are referred to as having “organized wholesale markets,” because the 

RTOs centrally coordinate these transactions between buyers and sellers 

according to rules the RTOs have established and FERC has approved.

In regions of the country without RTOs, electric utilities generally continue 

to serve the role of grid operator. In these regions, the local utility often 

integrates the delivery of electricity services—energy to maintain the 

balance of electricity generation and consumption, capacity to meet 

demand and provide a safety margin, and a range of ancillary services. 

Utilities in these regions may build and operate power plants to provide 

electricity to serve their retail customers. These utilities may also buy 

electricity from other power plant owners.

According to a 2006 FERC report on utilities’ demand-response activities, 

programs focused on reducing consumer demand for electricity as part of 

grid operators’ and utilities’ efforts to balance supply and demand have 

been in place for decades.20 FERC reported that demand-response 

activities—known as load management or demand-side management—

increased markedly in the 1980s and early 1990s. This increase was 

driven by a combination of a directive in the Public Utility Regulatory 

Policies Act of 1978 (PURPA) to examine standards for time-based 

pricing and by state and federal policy focused on managing consumer 

demand and planning future resource availability for providing 

electricity.21

 

20FERC, Assessment of Demand Response and Advanced Metering. Staff Report. Docket 

Number: AD-06-2-000, August 2006(revised 2008). 

However, according to data from NERC, estimates of certain 

demand-response activities generally declined between 1998 and 2003, 

just as FERC was beginning to restructure wholesale electricity markets.

21Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, 92 Stat. 3121 (1978) 

(codified at 16 U.S.C. § 2621).

Two Key DemandResponse Approaches
 

Page 14 GAO-14-73 Electricity Markets 

Demand-response activities may occur within both retail and wholesale 

markets. The actions taken by retail and wholesale demand-response 

program participants are often not substantially different and typically 

involve consumers reducing their electricity consumption by delaying or 

stopping the use of electricity-consuming appliances, processes, or 

machinery during periods of high demand. As with electricity prices, 

FERC and state regulators each have interest in and responsibility for 

overseeing aspects of these demand-response activities, at the wholesale 

and retail levels, respectively.

There are two broad approaches to demand-response: (1) consumerinitiated and (2) operator-initiated. Specifically, these approaches are as 

follows:

• Consumer-initiated approaches. With consumer-initiated demandresponse approaches, consumers determine when they will take 

specific actions to reduce the amount of electricity they consume. 

There are various types of consumer-initiated demand-response 

approaches. For example, retail consumers may pay time-based 

prices that vary with the cost of serving them with the goal of 

encouraging them to choose to reduce their use of electricity when 

prices are high.22

 

22The cost of serving consumers depends on the cost of producing electricity, which is 

based on the costs associated with the last generating plant needed to meet consumer 

demand. In restructured regions, the cost of serving consumers varies with the wholesale 

price of electricity. 

Time-based prices include time-of-use prices, which 

vary at broad intervals, such as peak and off-peak times, and realtime prices, which vary at least hourly in response to changes in 

market conditions such as the cost of producing electricity at that time.

Consumers’ actions to reduce demand may be manual—such as 

turning off lights or delaying use of the clothes dryer—or automatic—

such as using thermostats or other automated systems that are 

preprogrammed to reduce air conditioning use when prices reach a 

certain level. To participate in programs that use consumer-initiated 

approaches, consumers may need access to certain technology, such 

as the internet or a home display that provides information about 

changing prices. In addition, they may need a type of electric meter 

known as an advanced meter, which measures and records data on 

consumers’ electricity use at closer intervals than standard electricity 

meter—typically at least hourly—and provides these data to both 

consumers and electricity suppliers.
 

Page 15 GAO-14-73 Electricity Markets 

• Operator-initiated approaches. Operator-initiated approaches allow 

grid operators to call on participating consumers to reduce demand—

for example, by shutting down equipment—during periods of tight 

supply in exchange for a payment or other financial incentive. These 

approaches can minimize the number of consumers losing access to 

electricity during periods of extremely high demand, reduce stress on 

a distribution network, or help accommodate the unexpected shut 

down of a power plant or transmission line. Incentives for participation 

in these approaches may include a payment, a bill credit, or a lower 

electricity price. Although participation in programs that use these 

approaches is typically voluntary, participating consumers may incur 

financial penalties if they do not reduce demand as they agreed to.

Since 2004, the federal government has undertaken efforts to facilitate 

demand-response activities. These efforts include actions to address 

barriers to expanding demand-response activities by funding the 

installation of advanced meters and facilitating coordination between 

FERC and state regulators. In addition, FERC has undertaken efforts to 

remove barriers to expanding, as well as encouraging consideration of 

demand-response activities in wholesale markets by approving the use of 

various demand-response approaches in individual RTO markets it 

regulates and, more recently, taking steps to establish more consistent 

rules for all RTOs.

DOE, which formulates national energy policy and funds research and 

development on various energy-related technologies, among other things, 

has taken a key step to address one barrier we identified in our 2004 

report—the lack of advanced meters.23

 

23

Specifically, in 2010, DOE began 

providing $3.4 billion in funds appropriated under the 2009 American 

Recovery and Reinvestment Act to install, among other things, advanced 

meters, communications systems, and programmable thermostats in 

homes, businesses, and other locations where electricity is used. 

Recipients of these DOE funds, such as utilities, provided additional 

funding to total $7.9 billion of investment. In recent years, the installation 

of advanced meters has grown substantially. Data from FERC indicate 

GAO-04-844. 

The Federal 

Government Has 

Made Efforts to 

Facilitate DemandResponse Activities, 

Including Expanding 

Their Use in 

Wholesale Markets

DOE and FERC Have 

Taken Certain Actions to 

Help Address Barriers to 

Expanding DemandResponse Activities
 

Page 16 GAO-14-73 Electricity Markets 

that the installation of advanced meters as a percentage of total meters 

installed has grown from 0.7 percent in 2005 to 22.9 percent in 2011.24

FERC has also taken action to collaborate with state regulators on 

demand-response policies, best practices, and other issues. In 2004, we 

noted the importance of FERC continuing to work with grid operators, 

RTOs, and interested state commissions, among others, to develop 

compatible policies regarding demand-response activities.25 In 2006, 

FERC and the state public utility commissions—through the National 

Association of Regulatory Utility Commissioners26

In addition to their steps to address these barriers, FERC and DOE also 

took a series of steps to study how the federal government could 

encourage demand-response activities. The Energy Independence and 

Security Act of 2007 directed FERC to conduct a national assessment of 

demand-response potential, develop a national action plan on demandresponse activities, and with DOE, develop a proposal to implement the 

National Action Plan.

—took steps to 

coordinate their regulatory activities through a joint collaborative. This 

collaborative explored how federal and state regulators can better 

coordinate their respective approaches to demand-response policies and 

practices. In 2013, the focus of this collaborative was broadened to 

include additional topics that cut across the retail and wholesale electricity 

sectors to build more understanding between and amongst regulators. 

27 FERC completed A National Assessment of 

Demand Response Potential in 2009 and identified significant potential 

for demand-response activities to reduce peak energy demand under 

several different scenarios. Under one scenario, called the “full 

participation scenario,” FERC estimated that peak demand could be 

reduced by 188 gigawatts (GW)28

 

24FERC, Assessment of Demand Response and Advanced Metering, 2012.

compared with a scenario with no 

25GAO-04-844. 

26The National Association of Regulatory Utility Commissioners represents state public 

service commissions that regulate the utilities that provide energy, telecommunications, 

water, and transportation services.

27Energy Independence and Security Act of 2007, Pub. L. No. 110-140, §529, 121 Stat. 

1492, 1664-65 (codified at 42 U.S.C. § 8279). 

28One gigawatt is equal to 1,000 megawatts, 1,000,000 kilowatts, and 1,000,000,000 

watts. One traditional incandescent light bulb consumes about 60 watts, and a 

comparable compact fluorescent light bulb consumes approximately 15 watts.
 

Page 17 GAO-14-73 Electricity Markets 

demand-response activities within 10 years.29 This reduction is equal to 

approximately 2,500 peaking power plants.30 The national assessment 

also identified remaining barriers to the adoption of demand-response 

approaches—such as the divided federal and state oversight 

responsibilities and the absence of a direct connection between 

wholesale and retail prices. In 2010, FERC completed its National Action 

Plan on Demand Response, which identified proposed activities and 

strategies for demand-response approaches across three broad areas: 

assistance to the states, national communications, and providing tools 

and materials.31 One proposed action—the national communications 

program—has objectives focused on increasing consumer awareness 

and understanding of energy-consuming behavior and demand-response 

activities. FERC and DOE jointly completed the Implementation Proposal 

for the National Action Plan on Demand Response, identifying specific 

roles for DOE, FERC, and other entities. For example, DOE and FERC 

agreed to provide support for informational and educational sessions for 

regulators and policymakers.

 

29This scenario estimates the extent of cost-effective demand-response activities if 

advanced metering infrastructure were universally deployed; if consumers, by default, paid 

prices that vary with the cost of serving them; and if consumers were offered and used 

enabling technologies where it is cost-effective.

30In its 2009 assessment, FERC compared the size of potential reductions in peak 

demand from demand-response activities with the size of a peaking power plant, which it 

estimated to be about 75 MW in size.

31According to FERC officials, when developing the National Action Plan, FERC 

undertook a multiyear, collaborative process. FERC and DOE then worked with a diverse 

group of state officials, industry representatives, members of a National Action Plan 

Coalition, and experts from research organizations to develop tools and suggested 

approaches to implement recommendations made in the National Action Plan.
 

Page 18 GAO-14-73 Electricity Markets 

Since we last reported in 2004, FERC has formally acknowledged that 

demand-response activities are important in electricity markets in general 

and in particular, in wholesale markets overseen by RTOs.32 FERC has 

also reported that electricity markets are more effective when retail rates 

vary with the cost of serving consumers.

33 However, as retail markets are 

generally outside the scope of its authority, FERC historically focused its 

efforts on remaining barriers to participation of demand-response and 

encouraging RTOs to identify how demand-response activities could be 

incorporated into the wholesale markets they operate.34 FERC has found 

that demand-response activities directly affect wholesale electricity prices; 

therefore, facilitating demand-response activities is essential to FERC 

fulfilling its responsibility for ensuring wholesale prices are just and 

reasonable.35

Since 2004, FERC has taken steps to remove barriers to further expand

demand-response activities in RTO markets. Prior to our 2004 report, 

FERC had approved a few demand-response programs coordinated by 

the RTOs, but, as we reported, demand-response activities were in 

 

32Specifically, in a 2007 FERC Advance Notice of Proposed Rulemaking addressing 

Wholesale Competition in Regions with Organized Electric Markets, FERC highlighted the 

importance of demand-response activities in organized wholesale markets by describing 

potential benefits such as reduced wholesale prices. More broadly, in FERC’s 2009 

National Assessment of Demand Response Potential, FERC stated that demandresponse resources can play an important role in operational and long-term planning, as 

well as providing emergency response and ancillary services. 

33FERC, Advance Notice of Proposed Rulemaking. Wholesale Competition in Regions 

with Organized Electric Markets, RM07-19-000 and AD07-7-000, 72 Fed. Reg. 36276 

(Jun. 22, 2007).

34Though FERC officials told us FERC efforts to promote demand-response activities 

have largely been in RTO regions, they also told us that FERC took some steps to

address demand-response activities in orders that apply to both RTO and non-RTO 

regions. For example, in two orders related to transmission, FERC required entities 

providing access to transmission lines—for example, RTOs and utilities—to consider 

transmission and nontransmission alternatives, including demand-response activities, on a 

comparable basis when identifying transmission needs as part of their local and regional 

transmission planning processes. Order 890, Preventing Undue Discrimination and 

Preference in Transmission Service, 72 Fed. Reg. 12266 (Mar. 15, 2007); Order 1000, 

Transmission Planning and Cost Allocation by Transmission Owning and Operating Public 

Utilities, 76 Fed. Reg. 49,842 (Aug. 11, 2011). State regulators, utilities, and others have 

also taken steps to promote demand-response activities both in and out of RTO regions.

35FERC, Order 745-A, Demand Response Compensation in Organized Markets; Order on 

Rehearing and Clarification, RM10-17-001 (Dec. 15, 2011). 

FERC Has Approved the 

Use of More DemandResponse Activities in 

RTO Markets
 

Page 19 GAO-14-73 Electricity Markets 

limited use.36 Since our report was issued in 2004, individual RTOs have 

continued to develop opportunities for demand-response resources to 

provide specific services (e.g., energy, capacity, and ancillary services) 

through the markets they operate. According to FERC officials, FERC has 

reviewed these proposals on a case-by-case basis and, when FERC 

believed it to be appropriate, approved them. FERC has also addressed 

demand-response activities in broad orders related to other electricity 

regulation topics.37

As a result of FERC’s approval of changes to individual RTOs’ market 

rules, RTOs have utilized demand-response resources provided by 

various entities including both large electricity consumers and 

intermediaries. For example, demand-response resources may be 

provided directly by large consumers such as steel mills or other 

manufacturing facilities that purchase electricity directly from wholesale 

markets. These large consumers may delay the use of highly electricity 

intensive equipment, such as an electric arc furnace used to melt steel, 

until later in the day than they had planned in exchange for payments or 

other incentives. Demand-response resources may also be provided by 

intermediaries that combine the demand-response activities—for 

example, reductions in use of air-conditioning or household appliances at 

peak times—of multiple retail consumers to provide the quantity of 

demand-response resources required to participate in wholesale 

markets.38

 

36

These intermediaries may include retail service providers or 

utilities that have made arrangements with their customers through retail 

demand-response programs they administer to reduce demand in 

exchange for compensation or lower prices. It may also include third–

party entities referred to as “aggregators” that perform similar functions by 

GAO-04-844. 

37For example, FERC addressed demand-response activities in Order 890 related to 

transmission planning by, among other things, allowing qualified demand-response 

resources to participate in regional transmission planning processes. In Order 693, FERC 

required that the North American Electric Reliability Corporation—the U.S. electric 

reliability organization—revise reliability standards so that all technically feasible resource 

options, including demand-response resources, be employed in the management of grid 

operations and emergencies. 

38For example, in PJM Interconnection’s energy markets, which operate in the MidAtlantic and parts of the Midwestern United States, the minimum amount of demandresponse activities needed to participate is 100 kilowatts. Intermediaries may combine the 

demand-response activities of retail consumers in order to meet the offer minimum of 100 

kilowatts.
 

Page 20 GAO-14-73 Electricity Markets 

combining the demand-response activities of independent retail 

consumers. In some cases, these intermediaries combine a large number 

of small reductions made by many consumers. In other cases, they seek 

out medium and larger businesses to identify profitable opportunities to 

reduce larger amounts of demand when needed. Collectively, we refer to 

these entities as “demand-response providers”. 

In addition, demand-response resources can be used in wholesale 

markets to provide a wide range of services. Specifically, individual RTOs 

have allowed demand-response resources to be used to provide energy, 

capacity, and ancillary services to varying degrees. For example, 

according to documentation from PJM Interconnection,39

• Energy. Demand-response activities can help ensure that the 

generation and consumption of electricity remain in balance, with 

demand-response resources providing an alternative to energy 

scheduled from power plants. In RTO markets, demand-response 

providers can place offers to provide specified amounts of electricity 

during specific hours at specific prices. They provide this electricity by 

reducing their or their customers’ demand from levels they had 

expected to consume. Unlike the generators that are also bidding in 

these markets, which produce additional electricity by increasing the 

electricity generation of a power plant, demand-response providers 

make electricity available to the market by not consuming it. Demandresponse resources may be scheduled if they are among the least 

costly options for addressing energy needs at a particular location.

demandresponse resources are used to provide each of the three services within 

PJM Interconnection. Specifically, these services are as follows:

• Capacity. Demand-response resources can act as an alternative to 

power plant operators agreeing to be available to generate electricity 

at a future time. Demand-response providers agree to reduce their 

own or their customers’ electricity consumption at a future time when 

the grid operator determines such actions are needed.

 

39PJM Interconnection is an RTO that coordinates markets and the movement of 

wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, 

Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West 

Virginia, and the District of Columbia. 
 

Page 21 GAO-14-73 Electricity Markets 

• Ancillary services. Demand-response resources can act as an 

alternative to using changes in the amount of electricity generated to 

stabilize the grid. Grid operators may use demand-response 

resources for a short period of time to help stabilize the grid and 

ensure that electricity generated matches demand on a moment-tomoment basis.

Beginning in 2008, FERC issued a series of regulatory orders that 

establish more consistent rules related to demand-response activities for 

all RTOs. As shown in table 1, these orders establish a more 

standardized framework of rules for, among other things, how RTOs 

quantify and compensate demand-response activities in the markets they 

administer.

Table 1: Three Key FERC Orders Related to Demand-Response Activities

FERC order Date Description of key actions

Order 719 2008 • Requires Regional Transmission Organizations (RTO) to 

accept bids for demand-response resources in their markets 

for certain ancillary services, among other things

• Permits entities called aggregators that combine the demandresponse activities of multiple retail consumers into RTO 

markets, assuming such activity is not precluded by state law

Order 745 2011 a • Requires RTOs to pay providers of demand-response 

(including consumers) in wholesale energy markets the 

market price for electricity if doing so: (1) displaces electricity 

generation in a way that helps an RTO balance supply and 

demand and (2) is deemed cost-effective, meaning that the 

benefit from the reduction of the market price resulting from 

demand-response activities is greater than any money paid 

for the demand-response activities

Order 676-G 2013 • Incorporated by reference certain standards related to 

quantifying demand-response activities—including specific 

processes to help with measurement and verification of 

demand-response activities and common definitions and 

processes regarding demand-response activities in organized 

wholesale electric markets

Sources: GAO analysis of FERC orders and other filings.

a

Order 745 is currently being contested in the U.S. Court of Appeals for the D.C. Circuit.

These orders have addressed several aspects of demand-response 

activities. For example, in Order 676-G, FERC adopted standards 

FERC Has Taken Recent 

Steps to Make DemandResponse Rules More 

Consistent
 

Page 22 GAO-14-73 Electricity Markets 

established by the North American Energy Standards Board that provide 

detailed guidance about quantifying consumers’ demand-response 

activities.40 Quantifying demand-response activities requires creating 

baselines—administrative estimates of consumers’ expected electricity 

consumption for every hour of every day of the year against which any 

reductions in electricity use from demand-response activities are 

measured. Because consumer electricity use typically varies throughout 

the day, RTOs have no way of knowing exactly how much electricity a 

consumer is planning to use at specific times. The baseline—that is, the 

estimated amount of electricity a consumer would have used if not 

participating in demand-response activities—is key to determining the 

amount of electricity reduction for which a demand-response provider will 

be compensated. Additionally, through Order 745, FERC established a 

framework for determining the level of compensation for consumers’ 

demand-response activities. The order generally requires that, when 

certain conditions are met, demand-response providers receive the 

market price for electricity, equal to what owners of power plants would 

be paid.

Since 2006, FERC has taken steps to collect data and report on demandresponse activities, but these efforts have limitations. In particular, 

electricity markets have changed substantially since FERC began 

undertaking these efforts, but FERC has not reviewed the scope of its 

data collection and reporting efforts to determine whether additional data 

should be included. Further, FERC has, in some limited instances, made 

certain adjustments after these data are collected and before making 

them available to the public but does not fully document these 

adjustments or the reasons for making them.

 

40The North American Energy Standards Board serves as an industry forum for the 

development and promotion of standards for wholesale and retail natural gas and 

electricity, as recognized by its customers, business community, participants, and 

regulatory entities. The North American Energy Standards Board developed standards 

related to the measurement and verification of demand-response activities, which FERC 

incorporated by reference in Order 676-G. Measurement and verification involves 

quantifying consumers’ demand-response activities. As a result, in this report, we refer to 

measurement and verification as quantifying demand-response activities.

FERC Collects Data 

and Reports on 

Demand-Response 

Activities, but These 

Efforts Have 

Limitations
 

Page 23 GAO-14-73 Electricity Markets 

In accordance with the Energy Policy Act of 2005, FERC has collected 

data used to develop annual reports—FERC’s Assessment of Demand 

Response and Advanced Metering—about the extent to which advanced 

meters are used and consumers’ demand-response activities in the 

United States.41 To support the development of these annual reports, 

FERC has conducted a nationwide, voluntary survey every other year to 

collect information from utilities and other entities, such as RTOs, on their 

use of advanced meters, consumer participation in demand-response 

programs, and the extent to which consumers’ demand-response 

activities reduce peak demand. FERC makes the original survey data 

available on its website and summarizes key statistics about demandresponse activities and advanced metering based on this survey and 

other sources in its annual report.42 For example, FERC’s 2012 report 

included statistics on the potential reduction in peak demand from 

consumers’ participation in demand-response activities in total, by 

program approach (e.g., specific time-based pricing approaches),43

 

41In section 1252(e)(3) of the Energy Policy Act of 2005, Congress required FERC to 

prepare an annual report, by appropriate region, that assesses demand-response 

resources, including those available from all consumer classes. Pub. L. No. 109-58, § 

1252(e)(3), 119 Stat. 966 (2005). The report is to identify and review the following for the 

electric power industry: (1) saturation and penetration rate of advanced meters and 

communications technologies; (2) existing demand-response programs and time-based 

rate programs; (3) the annual resource contribution of demand resources; (4) the potential 

for demand-response resources as a quantifiable, reliable resource for regional planning 

purposes; (5) steps taken to ensure that, in regional transmission planning and operations, 

demand resources are provided equitable treatment; and (6) regulatory barriers to 

improve customer participation in demand–response activities.

by 

market (e.g., wholesale and retail), and, for retail demand-response 

activities, by class (e.g., commercial, industrial, and residential). The 

42In years where FERC does not conduct a survey, its annual report consists of updates 

based on publicly available information and discussions with market participants and 

industry experts.

43The potential to reduce peak electricity demand describes the capability of consumers 

participating in demand-response programs to reduce their electricity use which, in turn, 

may reduce the system’s peak electricity demand. Actual reductions in peak electricity 

demand indicate the amount that peak demand was actually reduced as a result of 

consumers’ actual demand-response activities. In many cases, consumers agree in 

advance to provide grid operators with a certain amount of demand-response resources, 

which reflects their demand-response potential. However, in practice, grid operators 

determine, based on system needs, whether and when to call upon consumers to provide 

the agreed-to amount of demand-response activities. Consumers may or may not provide 

the agreed-to amount of demand-response activities, but they may face a penalty if they 

do not.

FERC Has Taken Steps to 

Collect and Report Data 

on Demand-Response 

Activities
 

Page 24 GAO-14-73 Electricity Markets 

FERC survey data and report are the only source of broad data on 

demand-response activities we identified with this much detailed 

information by program approach. According to FERC officials, they are 

not aware of any other comprehensive data sources with data on 

demand-response activities and consumer participation by program 

approach.

Other sources of data on demand-response activities, while useful, are 

more limited in scope. For example, RTOs collect some data, but they 

focus only on a specific RTO region, and the RTOs may not collect 

consistent information for purposes of comparison across RTOs. The EIA 

also collects some data on demand-response activities; however, these 

data only focus on retail markets. Additionally, the North American 

Electric Reliability Corporation, known as NERC, collects some data but 

has only performed mandatory data collections since 2011. These data 

primarily focus on operator-initiated approaches, although a 2011 report 

from NERC states that there are plans to expand reporting to include 

additional consumer-initiated approaches in the future.

Since it initially designed its survey 8 years ago, FERC has considered 

some potential improvements to the survey, but it has not 

comprehensively reviewed the scope of its data collection and reporting 

efforts to address certain data limitations and changes in electricity 

markets over this period. FERC officials told us that, when designing the 

initial 2006 survey and annual report format, FERC sought to collect and 

report data that were consistent with the statutory requirements outlined 

in the Energy Policy Act while minimizing respondent burden to improve 

the response rate for its voluntary survey. The Energy Policy Act requires 

FERC to report on existing demand-response approaches, the annual 

size of demand resources, and regulatory barriers to improving consumer 

participation in demand-response activities and peak reduction programs, 

among other things. FERC’s report generally addresses these issues but, 

in some cases, the information it provides is limited and does not include 

some additional information or details that may be useful to data users—

such as regulators, utilities, and the public—for further documenting 

changes in trends in demand-response activities and progress in 

addressing certain barriers. Examples are as follows:

• FERC collects and reports data on the extent to which demandresponse activities at utilities and other entities surveyed reduce peak 

demand in megawatts (MW), but it does not collect or report data on 

what the total peak demand is for these reporting utilities and other 

FERC Has Not Reviewed 

the Scope of Its Data 

Collection and Reporting
 

Page 25 GAO-14-73 Electricity Markets 

entities. Without these data, the potential reduction in peak demand 

that reporting utilities’ and other entities’ demand-response activities 

achieve cannot be calculated as a percentage of their total peak 

demand, potentially limiting users’ ability to understand the impact of 

consumers’ demand-response activities.

• FERC reported in its 2012 report that the limited number of retail 

consumers paying prices that vary with the cost of serving them is an 

ongoing barrier to expanding demand-response activities, but its 

report provides limited data on consumer participation in approaches, 

such as real-time pricing programs, that could potentially address this 

barrier. Specifically, the report provides information on the number of 

utilities and other entities offering certain programs with prices that 

vary with the cost of serving consumers, such as time-of-use prices 

and real-time prices. However, the report does not provide much 

information on the number of consumers participating in these 

approaches over time—information needed to understand trends in 

the use of these approaches and whether steps are needed to 

encourage additional consumer participation.44

• FERC does not collect some potentially valuable data about the 

characteristics of consumers providing demand–response resources.

For example, FERC officials told us they do not collect data about the 

class of consumers —e.g., residential, commercial, and industrial—

providing demand-response resources in the RTO markets they 

regulate, although FERC does collect this information about 

consumers participating in retail programs. In addition, FERC does 

not collect data on the size of consumers—for example, small 

businesses compared with large industrial manufacturers—

participating in demand-response activities. Not having these data 

limits data users’ understanding of the extent to which different types 

of consumers are participating in demand-response activities and 

whether additional opportunities exist for increasing the participation 

of certain types of consumers. Based on estimates the individual 

 

44FERC’s 2012 Assessment of Demand Response and Advanced Metering report 

includes data on the number of residential consumers participating in time-of-use 

programs. It does not include data on other consumer types, for example, commercial and 

industrial consumers, participating in this type of program, and it does not include data on 

consumers participating in other programs, such as real-time pricing programs, where 

prices vary with the cost of serving consumers. However, FERC provides access to these 

other data through data spreadsheets posted on its website.
 

Page 26 GAO-14-73 Electricity Markets 

RTOs provided, demand-response resources are typically provided by 

larger consumers, such as industrial and commercial facilities. Each 

RTO collects data about consumers in different categories and groups 

the data in different ways. For example, data collected by one RTO—

New York ISO—indicate that approximately 57 percent of the 

demand-response resources in its region are from the industrial sector 

and 14 percent are from the commercial sector.45 Other RTOs told us 

that no data were available on the categories of customers providing 

demand-response resources. Another RTO—ISO New England—told 

us that all the demand-response resources in its region are provided 

by industrial and commercial consumers, but that disaggregated data 

are not available.46

Moreover, FERC officials agreed that there have been significant 

changes in the electricity markets and participation in demand-response 

activities since the survey was initially developed. FERC staff considered 

some potential improvements to the survey instrument, including ways to 

make questions less burdensome and improve data quality. However, 

these officials told us that FERC did not comprehensively review the 

content of the survey or its final report, instead seeking to make its 

reporting consistent across years. FERC officials also noted that changes 

to its survey will need to be approved by the Office of Management and 

Budget.47

 

45The New York ISO reported other categories of data that could potentially be combined 

with the above categories, including light manufacturing (10 percent) and other 

commercial (5 percent).

46ISO New England is an RTO serving Connecticut, Maine, Massachusetts, New 

Hampshire, Rhode Island, and Vermont.

47Federal agencies must obtain approval from the Office of Management and Budget 

under the Paperwork Reduction Act (Pub. L. No. 96-511, 94 Stat. 2812 (1980), codified at 

44 U.S.C. §3501 et seq.) before requesting information from the public, such as through a 

survey. The Paperwork Reduction Act was enacted to minimize the paperwork burden 

resulting from the collection of information by or for the federal government. The act 

generally provides that every federal agency must obtain approval from the Office of 

Management and Budget before using identical questions to collect information from 10 or 

more persons. To obtain approval, agencies must provide to the Office of Management 

and Budget: (1) a description of the information to be collected, (2) the reason the 

information is needed, and (3) estimates of the time and cost for the public to answer the 

request. Examples of information collections include surveys, permits, questionnaires, and 

reports.
 

Page 27 GAO-14-73 Electricity Markets 

We have previously reported that evaluation can play a key role in 

program management and oversight—including evaluation of activities 

with an identifiable purpose.48

 

48GAO, Program Evaluation: Strategies to Facilitate Agencies’ Use of Evaluation in 

Program Management and Policy Making, 

In this context, FERC’s data collection and 

reporting efforts to comply with the Energy Policy Act of 2005 would 

benefit from such an evaluation in light of the changes FERC 

acknowledges have occurred in electricity markets and in demandresponse activities more specifically. Such an evaluation can provide 

feedback on program design and execution, and the results may be used 

to improve the design of the program. In addition, the National Research 

Council’s Committee on National Statistics has reported in its Principles 

and Practices for a Federal Statistical Agency, that statistical agencies 

should continually look to improve their data systems to provide 

information that is accurate, timely, and relevant for changing public 

policy and data user needs. Although FERC is not a federal statistical 

agency, we believe the practices outlined in this publication are relevant 

to its data collection and reporting efforts because FERC is uniquely 

positioned to collect these data, and they remain the only source of broad 

demand-response data we identified with detailed information about 

demand-response approaches. Other federal agencies that are not 

statistical agencies may find it useful to periodically reassess the data 

they collect. For example, the Merit Systems Protection Board, which is 

also not a federal statistical agency, has periodically reassessed the 

content of a key survey it produces. Specifically, the Merit Systems 

Protection Board has been administering its Merit Principles Survey for 

the past 30 years to capture the attitudes, opinions, and views of the 

federal workforce and has stated that it has included a core set of items in 

its survey repeatedly, allowing comparisons over time, but has changed 

the survey considerably, reflecting the need to cover timely research 

topics. By not reviewing the contents of its survey on demand-response 

activities and annual report in light of the significant changes in the 

electricity market and demand-response activities over the last 8 years, 

FERC cannot ensure that its survey and report fully capture information 

that is most useful to data users today. As a result, information that could 

assist regulators in determining how to focus their oversight efforts—data 

GAO-13-570 (Washington, D.C.: June 26, 

2013). Additionally, in a 2012 report, GAO stated that a program can be defined in various 

ways, including an activity or project with an identifiable purpose or set of objectives. 

GAO, Designing Evaluations (2012 revision) GAO-12-208G (Washington D.C.: January 

2012).
 

Page 28 GAO-14-73 Electricity Markets 

on the impact of demand-response activities; the extent to which progress 

has been made in addressing barriers to expanding demand-response 

activities, such as the limited number of retail consumers paying prices 

that vary with the cost of serving them; and trends in consumer 

participation—may not be readily available. Without additional evaluation 

of its program activity responsible for its annual Assessment of Demand 

Response and Advanced Metering—the only data collection we identified 

with this level of detailed information—FERC may be missing 

opportunities to improve the report and survey’s design, which could limit 

users’ ability to understand the impact of demand-response activities and 

determine whether changes are needed to improve the effectiveness of 

demand-response efforts.

FERC adjusts some survey data collected for its annual Assessment of 

Demand Response and Advanced Metering report before publishing 

them; however, these adjustments are not well documented. The original 

data FERC collects from its survey are available to the public on its 

website, but these data do not always match data in FERC’s reports. 

FERC officials told us that, in some limited cases, they used their 

judgment to adjust the original survey data to improve their quality and 

accuracy prior to using these data in the reports FERC issues to the 

public. For example, FERC staff told us that they have previously 

modified the survey data to ensure duplicate data on demand-response 

activities are not reported in both the retail and wholesale market 

categories and to improve the consistency of the data. However, FERC 

neither fully documents these adjustments, or the reasons for them 

internally or in its annual reports, nor makes its final, modified data set 

available to the public. As a result, it is difficult for data users to replicate 

the statistics in FERC’s annual reports, which could limit the usefulness of 

the data to these users. We compared key statistics included in FERC’s 

2012 report and the associated original survey data reported on FERC’s 

website and were unable to replicate FERC’s results in some cases. For 

example, in some cases, our analysis of the original survey data yielded 

different results about the extent to which certain demand-response 

approaches are used at the wholesale level than what FERC published in 

its annual report.

Best practices for data management advise that key steps to modify data 

be documented. Specifically, the Office of Management and Budget’s 

2006 Standards and Guidelines for Statistical Surveys advises that data 

collected through surveys should be coded to indicate any actions taken 

during editing or that copies of the unedited data, along with the edited 

FERC Does Not Fully 

Document Adjustments It 

Makes to Its Data
 

Page 29 GAO-14-73 Electricity Markets 

data, be retained. Because FERC neither fully documents the 

modifications it makes to the data or maintains a final version of the 

modified data, FERC officials could not provide reasons for many of the 

specific differences we identified between the original survey data and the 

data reported in FERC’s 2012 annual report or verify whether these 

differences were the result of appropriate modifications or errors. These 

officials told us they had not identified a need to document this 

information to date, but that they would consider documenting it in the 

future. Although the rationale for FERC’s data modifications may be 

sound, because they are not fully documented, it is unclear what changes 

were made, the reasons they were made, and whether these changes are 

appropriate. Furthermore, since the users of these data, such as state 

regulators and the public, may not have the means or ability to easily 

replicate FERC’s efforts to modify the survey data, they must either 

analyze the original survey data or rely on only the statistics that FERC 

included in its final report—options which may be less informative. This 

could, for example, limit data users’ understanding of how the number of 

consumers participating in certain demand-response approaches has 

changed over time—information that could be useful to regulators for 

understanding the extent to which consumer willingness to participate in 

certain approaches is, or is not, changing. By not fully documenting the 

adjustments made to its data, FERC is limiting the usefulness of these 

data to users and limiting their transparency for analysis. Greater 

transparency of these data could provide a better foundation for analysis 

of trends in specific demand-response approaches and the extent to 

which progress has been made in addressing barriers to demandresponse activities.
 

Page 30 GAO-14-73 Electricity Markets 

The extent of demand-response activities has increased overall since our 

2004 report, more than doubling between 2005 and 2011. Specifically, 

according to data reported in FERC’s 2012 Assessment of Demand 

Response and Advanced Metering report, the extent of demand-response 

activities reported by utilities and other entities responding to FERC’s 

survey more than doubled from a total of 29,653 MW of potential 

reduction in peak demand in 2005 to 66,351 MW in 2011,49 or about 8.5 

percent of the peak U.S. demand in 2011.

50 Of this 66,351 MW, 57 

percent (37,543 MW) was provided through retail demand-response 

activities, while 43 percent (28,807 MW) was provided through wholesale 

demand-response activities.51 Demand–response activities in both retail 

and wholesale markets have increased over this same period, but their 

characteristics have varied. In retail markets, FERC data indicate that the 

quantity of demand-response activities increased 81 percent from 2005 

through 2011. Further, operator-initiated approaches were more widely 

used than consumer-initiated approaches. In wholesale markets, FERC 

data indicate that demand-response activities more than tripled from 2005 

through 2011, but the extent of demand-response activities has varied by 

RTO region over time and by the services provided.

 

49We were not able to identify a single data source that comprehensively quantifies the 

extent and type of demand-response activities in retail and wholesale markets. For this 

reason, for information on the extent to which demand-response activities have changed 

over time, we provide data from FERC’s annual Assessment of Demand Response and 

Advanced Metering report. These data were gathered through surveys FERC conducted 

and, unless otherwise noted, the data we present reflect the data reported by the 59 

percent of utilities and other entities responding to the survey, rather than the extent of 

demand-response activities throughout the United States. In addition, most of the 

demand-response statistics FERC included in its 2012 report relate to potential reduction 

in peak demand. As a result, we have also focused our analysis of FERC data on potential 

reductions in peak demand.

50FERC does not collect data in its survey on peak electricity demand for all reporting 

utilities and other entities. As a result, we were unable to compare FERC’s estimate of the 

potential of demand-response activities to reduce peak electricity demand to the actual 

peak demand of the utilities and other entities responding to its survey. According to data 

from DOE’s EIA—which collects and analyzes a variety of energy and electricity data 

nationwide about topics such as energy supply and demand—2011 summer peak demand 

for the continental United States was 782,469 MW.

51Totals in the draft may not sum exactly due to rounding. 

Demand-Response 

Activities Have 

Increased Overall, but 

Their Characteristics 

Have Varied
 

Page 31 GAO-14-73 Electricity Markets 

FERC data indicate that the extent of demand-response activities in retail 

markets has increased overall but varied by consumer type and 

approach. Specifically, data from FERC’s 2012 Assessment of Demand 

Response and Advanced Metering report indicate that the extent of retail 

demand-response activities has increased 81 percent overall from a 

reported 20,754 MW of potential reduction in peak demand in 2005 to a 

reported 37,543 MW in 2011. Commercial and industrial consumers were 

responsible for more of these retail demand-response activities than 

residential consumers. For example, of the 37,543 MW of potential 

reduction in peak demand from retail demand-response activities in 2011, 

28,088 MW (75 percent) was from commercial and industrial consumers, 

while 8,134 MW was from residential consumers (22 percent).52 The 

relatively lower contribution in MW of demand-response activities by 

residential consumers is particularly notable because, according to a 

2009 FERC report, residential consumers represent the most untapped 

potential for demand-response activities.53

Data from FERC and EIA also indicate that retail consumer participation 

in demand-response programs varies by approach, with operator-initiated 

approaches more widely used than consumer-initiated approaches.

Demand-response activities 

from residential consumers can be particularly important because 

residential consumers can be responsible for a large share of peak 

demand, which can strongly affect prices during the hours of peak 

electricity consumption. For example, according to data from the Texas 

grid operator, over 50 percent of peak demand during Texas summers 

may come from residential consumers.

54

 

52Demand-response activities from consumers FERC categorized as “other” were 

responsible for the remaining 1,321 MW (4 percent) of this potential reduction in peak 

demand from retail demand-response activities. 

53FERC, A National Assessment of Demand Response Potential, June 2009.

54We were not able to identify a data source that comprehensively quantifies the extent of 

consumer participation in various demand-response approaches in retail markets. For this 

reason, to analyze the extent of consumer participation in various demand-response 

approaches, we analyzed survey data FERC collected to develop its 2012 report. Unless 

otherwise noted, the data we present reflect the data reported by the 59 percent of utilities 

and other entities responding to the survey. They do not represent the extent of demandresponse activities throughout the United States. Furthermore, the data we report may not 

match what was reported in FERC’s 2012 Assessment of Demand Response and 

Advanced Metering report, since the agency made modifications to improve data quality 

prior to publication. Because these modifications were not documented, we could not 

verify their relevance to our analysis and instead chose to report the original survey data. 

More information on our approach to analyzing these data can be found in appendix I.

Demand-Response 

Activities in Retail Markets 

Have Increased Overall, 

but Consumer Type and 

Approaches Varied
 

Page 32 GAO-14-73 Electricity Markets 

Data collected for FERC’s 2012 report indicate that approximately 6.5 

percent of retail consumers of utilities and other entities responding to the 

survey—about 8.5 million of 130.6 million consumers—were enrolled in a 

demand-response program in 2011.55 Of these 8.5 million consumers, 

approximately 6.0 million (71 percent) participated in programs that used 

operator-initiated approaches.56 Consumers enrolled in demand-response 

programs using operator-initiated approaches accounted for 

approximately 27,422 MW of potential reduction in peak demand for 

2011. Industrial and commercial retail consumers provided 19,089 MW 

(70 percent) of this potential reduction, and residential consumers 

provided 7,151 MW (26 percent).57

Table 2: Examples of Operator-Initiated Approaches

Table 2 shows the extent to which 

consumers participate in two key operator-initiated approaches.

Name Description

Number of consumers enrolled in 

this approach (as a percentage of 

consumers enrolled in operatorinitiated approaches)

Potential reduction in peak 

demand (as a percentage of 

potential reduction in peak 

demand from all operator-initiated 

approaches)

Direct demand 

control

Compensates consumers for 

allowing the utility or grid operator to 

remotely interrupt electricity use by 

one or more electrical devices, such 

as pool pumps or air conditioners. In 

some cases, electricity may be 

interrupted for an hour or more; in 

other cases, the operator may 

“cycle” the equipment—that is, shut 

it down for several short periods, 

which can have less impact on the 

consumer. 

5.8 million (97 percent) 9,112 MW (33 percent)

 

55In many cases, consumers were not able to participate in demand-response programs 

through their utilities. Of the 130.6 million consumers of utilities responding to FERC’s 

2012 survey, 16.5 million or 13 percent were from utilities that did not offer demandresponse programs.

56The 6.0 million consumers that used operator-initiated approaches represent 

approximately 5 percent of the 130.6 million consumers of utilities responding to FERC’s 

survey.

57Consumers identified as “other” were responsible for the remaining 1,182 MW (4 

percent) of potential reduction in peak demand from operator-initiated approaches.
 

Page 33 GAO-14-73 Electricity Markets 

Name Description

Number of consumers enrolled in 

this approach (as a percentage of 

consumers enrolled in operatorinitiated approaches)

Potential reduction in peak 

demand (as a percentage of 

potential reduction in peak 

demand from all operator-initiated 

approaches)

Interruptible 

prices

Participants—typically, large 

industrial or commercial 

consumers—receive a discount on 

electricity prices paid in exchange for 

agreeing to interrupt electricity use 

when directed to do so by the grid 

operator. In some cases, consumers 

give grid operators the ability to 

interrupt their electricity use directly 

by a preestablished amount for a 

certain number of hours per year. 

.04 million (about 1 percent) 14,960 MW (55 percent)

Sources: GAO analysis of 2011 FERC survey data collected for FERC’s 2012 Assessment of Demand Response and Advanced 

Metering and other sources.

Of the 8.5 million consumers who utilities and other entities reported as 

participating in demand-response programs, approximately 2.3 million (27 

percent) participated in programs that used consumer-initiated 

approaches, including some retail pricing plans that sought to better align 

consumer prices with the cost of serving those consumers.58 According to 

our analysis of FERC’s survey data for 2011, consumers enrolled in 

demand-response programs that used these approaches accounted for 

approximately 9,920 MW of potential reduction in peak demand for the 

given year. Industrial and commercial retail consumers provided 8,893 

MW (90 percent) of this 9,920 MW of the potential reduction. Table 3 

shows the extent to which consumers participate in three key types of 

consumer-initiated approaches.

 

58The approximately 2.3 million consumers that used consumer-initiated approaches 

represent approximately 2 percent of the 130.6 million consumers from utilities responding 

to FERC’s survey.
 

Page 34 GAO-14-73 Electricity Markets 

Table 3: Examples of Consumer-Initiated Approaches

Name Description

Number of consumers 

enrolled in this approach 

(as a percentage of 

consumers enrolled in 

consumer-initiated 

approaches)

Potential reduction in 

peak demand (as a 

percentage of potential 

reduction in peak 

demand from all 

consumer-initiated 

approaches)

Time-of-use 

prices

Sets preestablished prices for predetermined parts of the 

day (i.e., off-peak, often during the night and early morning; 

midpeak, often during the day and late evening; peak, often 

in the late afternoon and early evening). The highest prices 

are established for peak periods when demand and the 

cost of serving consumers are generally highest, based on 

historical and projected cost and consumption information. 

Periods may vary seasonally, for example, with different 

peak periods in the summer than in the winter. Prices 

generally remain consistent throughout a given period, 

regardless of specific levels of hourly demand or changes 

in the cost of serving consumers.

2.2 million (98 percent) 7,373 MW (74 percent)

Critical 

peak 

prices

In some cases, in addition to the time-of-use prices, a utility 

may also establish a “critical peak price,” which is higher 

than the on-peak price and is designed to encourage 

consumers to make even more significant reductions in 

their electricity use during a few specific hours. Such a 

price would be initiated in response to particularly high 

costs of serving consumers or reliability concerns. A critical 

peak price is generally used only for a limited number of 

days and hours as determined by the utility, and 

consumers may not know that a critical peak price will go 

into effect until the day before or day of.

a

0.02 million (about 1 percent) 431 MW (4 percent)

Real-time 

prices

Consumers are charged prices that typically vary at least 

hourly based on their utility or retail service providers’ cost 

of serving them. For example, this may include prices that 

vary with the wholesale price of electricity.

0.02 million (about 1 percent) 1,905 MW (19 percent)

Sources: GAO analysis of 2011 FERC survey data collected for FERC’s 2012 Assessment of Demand Response and Advanced 

Metering and other sources.

a

This included what FERC called “critical peak pricing” and “critical peak pricing with load control” in 

its 2012 report.

In addition to FERC’s 2011 survey data, data from an EIA survey of 

utilities in 2011 also indicate that more consumers reported participating 

in programs that use operator-initiated approaches than consumer-
 

Page 35 GAO-14-73 Electricity Markets 

initiated approaches.59 According to the EIA data, 3.7 percent of retail 

consumers (5.4 million of 144.5 million) of utilities that responded to the 

survey reported participating in operator-initiated approaches in 2011, 

and 2.8 percent of retail consumers (4.0 million of 144.5 million) of such 

utilities reported participating in consumer-initiated approaches. EIA data 

show that reported retail demand-response activities resulted in the 

potential to reduce peak electricity demand by 26,596 MW in 2011. Actual 

reductions in peak electricity demand—a result of consumers’ actual 

demand-response activities—in 2011 were much lower—12,126 MW.

Data from FERC and the RTOs indicate that the extent of wholesale 

demand-response activities has increased overall but varies regionally 

and by the service provided. In its 2012 Assessment of Demand 

Response and Advanced Metering report, FERC reported data that show 

that the extent of wholesale demand-response activities has increased 

overall, more than tripling from a reported 8,899 MW of potential 

reduction in peak demand in 2005 to 28,807 MW of potential reduction in 

peak demand in 2011. According to RTO data, these demand-response 

resources in wholesale markets overseen by each RTO have varied over 

time, as shown in figure 3.

 

59EIA collected this information through a mandatory 2011 survey it conducted of utilities. 

In this survey, it asked 3,287 utilities how many consumers participated in what it called 

“incentive-based” demand-response approaches and “time-based rate” approaches. 

Examples EIA provided of “incentive-based” approaches included financial incentives, 

direct demand control, and interruptible prices, among other things. Examples EIA 

provided of “time-based rate” approaches included real-time prices, critical peak prices, 

and time-of-use rates, among other things. EIA does not ask those surveyed to provide 

more detailed information about demand-response approaches. We believe that these 

approaches generally align with the two demand-response approaches presented in our 

report: operator-initiated and consumer-initiated, respectively.

Wholesale DemandResponse Activities Have 

Increased Overall and 

Have Varied by Region 

and the Service Provided
 

Page 36 GAO-14-73 Electricity Markets 

Figure 3: Regional Transmission Organization Demand-Response Capacity as a 

Percentage of Total System Capacity (2006 – 2012)

Note: This figure shows the percentage of each RTO’s demand-response capacity as a percentage of 

each RTO system’s total capacity to meet consumer demand (i.e., “total installed capacity”). These 

numbers were initially prepared by the RTOs for FERC as a part of two annual reports on RTO 

performance metrics. The RTOs provided data for more recent years to us. Given the unique nature 

of each RTO region, including the markets RTOs offer and opportunities for demand-response 

activities, each RTO’s methodology for calculating this metric may vary. Because most Electric 

Reliability Council of Texas activities are not regulated by FERC, the Electric Reliability Council of 

Texas was not required to submit information to FERC for this performance metric.

a

The Southwest Power Pool provided updated data to us for this metric. As a result, its data do not 

match the data reported in the FERC annual reports on RTO performance metrics. Additionally, 

because the Southwest Power Pool’s markets were not active in 2006, data are not available for that 

year.

b

Beginning with the 2010 data, New York ISO made modifications to its approach for calculating this 

metric.

c

As initially reported to FERC, the California Independent System Operator included retail demandresponse activities and interruptible load programs in its calculation of regional demand-response 

activities. With one exception, these retail programs are not operated or triggered by the California 

ISO.
 

Page 37 GAO-14-73 Electricity Markets 

The extent of wholesale demand-response activities in RTOs also varies 

by the service they provide, with demand-response resources used to 

provide capacity being the most common. Demand-response resources 

that provide capacity involve demand-response providers making 

commitments to the RTO to reduce their or their customers’ use of 

electricity when the grid operator directs them to do so, for example, 

because of reliability concerns from higher than expected demand or a 

generating unit that was expected to produce electricity but could not do 

so. According to stakeholders, these commitments to reduce demand are 

functionally similar to power plant operators agreeing to increase their 

generation of electricity. As shown in figure 4, data from FERC and the 

RTOs indicate that 76 percent of the wholesale demand-response 

resources in the RTO regions were used to provide capacity.60

 

60According to our analysis of FERC data, 76 percent of demand-response activities were 

from consumer agreements to provide capacity in the future. When requested by the grid 

operator, for example, due to a concern about reliability, these agreements may result in 

demand-response activities used for energy, which are not reflected in this graphic.

Less 

common are demand-response resources to provide ancillary services, 

which, according to our analysis of FERC data, accounted for 5 percent of 

the demand-response resources in RTO markets in 2011. Likewise, 

demand-response resources to provide energy accounted for about 17 

percent of demand-response resources in RTO markets, according to our 

analysis of FERC’s data.
 

Page 38 GAO-14-73 Electricity Markets 

Figure 4: Demand-Response Resources in Regional Transmission Organization 

Regions in 2011 Used to Provide Ancillary Services, Capacity, and Energy, 

Measured in Megawatts of Reported Potential Reduction in Peak Demand

Note: This figure provides data on the potential reduction in peak demand from demand-response 

resources in RTO areas. These demand-response resources are reflected in both the retail and 

wholesale demand-response activity totals presented in other parts of this report. The RTOs provided 

these data to the Federal Energy Regulatory Commission (FERC) in the survey associated with 

FERC’s 2012 Assessment of Demand Response and Advanced Metering report. With assistance 

from the RTOs, we categorized RTO demand-response programs based on whether they addressed 

a need for ancillary services, capacity, energy, or other. In some cases, demand-response programs 

have been updated or changed by the RTOs since this information was reported to FERC. 

Additionally, FERC took various steps to modify reported categories for the purpose of improving data 

quality prior to reporting similar information in its 2012 Assessment of Demand Response and 

Advanced Metering report. Because these modifications were not documented, we were unable to 

verify their appropriateness for inclusion in this analysis. As such, in all cases but one, we used the 

original survey data reported on FERC’s website for this analysis. In the case of data from the 

Midcontinent Independent System Operator, FERC staff informed us that the data reported on the 

agency website was not correct and provided us with the corrected survey data.
 

Page 39 GAO-14-73 Electricity Markets 

a

Ancillary services involve demand-response providers making small adjustments in the amount of 

electricity used or delivered for short periods of time to help stabilize the grid.

b

Capacity involves demand-response providers making commitments to the RTO to reduce their or 

their customers’ use of electricity when the grid operator directs them to. In some cases when 

requested by the grid operator, for example, due to a concern about reliability, these commitments 

may result in demand-response activities for energy, which are not reflected in this graphic.

c

Energy involves demand-response providers lowering their or their customers’ use of electricity, 

which can help maintain the overall balance of electricity generation and consumption.

d

The other category includes demand-response resources from Midcontinent Independent System 

Operator and California Independent System Operator that are used to provide both energy or 

ancillary services. To avoid double counting, we included these demand-response activities in the 

other category.

e

For ISO New England, we excluded 877 MW of potential reduction in peak demand reported to 

FERC because ISO New England explained that this is more properly categorized as energy 

efficiency, rather than demand-response activities.

According to stakeholders, current demand-response efforts provide 

benefits for consumers, including increasing reliability, lower prices, and 

delaying the need to develop new power plants and transmission lines. 

However, FERC’s efforts to remove barriers and to encourage demandresponse activities have made wholesale markets more complex by 

introducing administrative functions that, according to stakeholders, have 

led to challenges, and it is too soon to tell whether FERC’s steps to 

address these challenges will be effective. In addition, according to some 

stakeholders and reports we reviewed, retail prices remain largely 

unresponsive to market conditions, which poses challenges by limiting the 

potential for consumers to respond to changes in the cost of producing 

electricity or prices in wholesale markets.

Stakeholders we interviewed identified examples of how demandresponse efforts have resulted in benefits, including increased reliability, 

lower prices, and delayed need to develop additional power plants and 

transmission lines. Specifically, examples are as follows:

• Increased reliability. Many stakeholders noted that demandresponse activities can enhance the reliability of the electricity system 

by providing an additional tool to manage emergencies, such as 

electricity shortages. For example, according to documentation from 

PJM Interconnection, the demand-response activities of consumers in 

its region helped the RTO maintain reliability in 2013 during an 

unusual September heat wave that led to two of the highest electricity 

use days of the year since July. According to this documentation, 

demand-response activities estimated to total 5,949 MW—

comparable to the electricity output of five nuclear power plants—

Demand-Response 

Efforts Have Resulted 

in Benefits, but 

Current Efforts 

Continue to Pose 

Challenges in 

Wholesale Markets

Stakeholders Identified 

Examples of Benefits 

Provided by DemandResponse Efforts
 

Page 40 GAO-14-73 Electricity Markets 

helped stabilize the grid. In addition, in January 2014, cold 

temperatures and power plant outages in Texas triggered an 

emergency reliability alert. ERCOT—Texas’ grid operator—utilized the 

demand-response activities of consumers in the region, in addition to 

voluntary requests for consumers to conserve activity, to help stabilize 

the grid.

• Lower prices. Several stakeholders noted that demand-response 

activities lower wholesale market prices by helping grid operators 

avert the need to use the most costly power plants during periods of 

otherwise high electricity demand. For example, according to 

representatives from PJM Interconnection, prices spiked on July 17, 

2012, during a heat wave, when electricity demand rose to its highest

levels that year. According to these representatives, demandresponse activities served as an alternative to generating additional 

electricity, which lowered prices, although given the complex set of 

factors like weather and location that affect prices, the representatives 

could not quantify the extent of the price reduction attributable to 

demand-response activities.

• Delayed need for power plants and transmission lines. Several 

stakeholders we spoke with—including representatives from PJM 

Interconnection; Midcontinent Independent System Operator;61 and 

ISO New England—noted that demand-response activities may help 

delay the need to develop additional power plants and transmission 

lines. For example, according to documents from the Midcontinent 

Independent System Operator, demand-response activities in its 

region delayed the need to construct new power plants, which 

amounted to an estimated annual benefit of between $112 and $146 

million.

 

61The Midcontinent Independent System Operator is an RTO that coordinates the markets 

and the movement of wholesale electricity. It operates in all or parts of the following U.S. 

states: Arkansas, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, 

Mississippi, Missouri, Montana, North Dakota, South Dakota, Texas, and Wisconsin.
 

Page 41 GAO-14-73 Electricity Markets 

FERC’s efforts to remove barriers and to encourage demand-response 

activities in wholesale markets have added complexity to these markets 

by introducing administrative functions that, according to stakeholders, 

have led to challenges. Stakeholders identified key challenges to 

quantifying and compensating wholesale demand-response activities, and 

it is too soon to evaluate whether FERC’s steps to address these 

challenges will be effective.

Stakeholders we spoke with highlighted two key challenges to quantifying 

demand-response activities: (1) developing baselines and (2) the 

potential for manipulation of baselines. FERC has taken steps to address 

these challenges by adopting standards for quantifying demand-response 

activities and undertaking enforcement activities, but these steps require 

time and resources, and it is too soon to tell whether they will be effective.

First, several stakeholders said that developing baselines in electricity 

markets—that is, an estimate of how much electricity a consumer would 

have consumed if not for their demand-response activities—can be 

difficult. Individual electricity consumption reflects factors unique to 

individual consumers that are inherently difficult to predict. Specifically, 

consumers’ past electricity use does not necessarily predict future use 

because electricity use depends on many variables, such as weather and, 

for large industrial consumers, production cycles. For example, the 

electricity demand of some industrial and commercial consumers is 

difficult to estimate because their electricity consumption varies based on 

changes in the demand for the products they produce. Further, 

determining when to measure a baseline can be difficult since consumers’ 

electricity use may vary frequently and electricity use before and after a 

consumer’s demand-response activities may not accurately reflect the 

extent of the consumer’s demand-response contribution. For example, 

comments from an industrial coalition and two demand-response 

aggregators to FERC describe a potential situation in which a steelmaker 

has a furnace temporarily out of service for maintenance. After 

maintenance is completed, if the steelmaker chooses to take a demandresponse action by delaying its next production cycle, measuring this 

steelmaker’s baseline immediately before the steelmaker took the 

demand-response action—when its furnace was out of service—would 

not reflect the steelmaker’s contribution. Baselines can have significant 

implications for demand-response activities. If a baseline is set too high, 

FERC’s Efforts to Remove 

Barriers and Encourage

Demand-Response 

Activities Have Made 

Wholesale Markets More 

Complex and Introduced 

Challenges, and It Is Too 

Soon to Evaluate Steps to 

Address Challenges

Stakeholders Stated That 

Quantifying Wholesale 

Demand-Response Activities 

Poses Two Key Challenges 

That Require Time and 

Resources to Address
 

Page 42 GAO-14-73 Electricity Markets 

consumers may be compensated for a greater quantity of electricity 

resulting from their demand-response actions than the quantity they 

actually provided, potentially raising costs to all electricity consumers who 

ultimately pay for demand-response activities. If the baseline is set too 

low, consumers may not be credited with providing the quantity of 

electricity resulting from the demand-response actions they actually 

provided, and they may be less willing to take demand-response actions 

in the future, limiting the potential benefits. As a result, RTOs and 

demand-response providers must devote resources to the efforts of 

developing reasonable and fair baselines for demand-response programs 

to operate effectively.

Second, some stakeholders noted that using baselines as a key 

component of compensation for demand-response activities subjects 

them to manipulation, which requires RTOs and FERC to devote time and 

resources to oversight and enforcement. For example, in recent years, 

FERC has identified multiple instances in which consumers manipulated 

their baseline to receive additional financial compensation for demandresponse activities or to avoid financial penalties for not providing the 

quantity of demand-response activities they agreed to. Specifically, in 

June 2013, FERC reported what it believed were irregular activities by a 

company that manages sports and entertainment facilities. According to a 

FERC document, witnesses reported that stadium lighting at one of the 

company’s baseball stadiums was turned on 2 hours before a demandresponse event was scheduled to begin.62 No games were scheduled for 

that day, indicating that the increased electricity use was not needed for 

operations at the ballpark. These actions could have artificially inflated the 

company’s baseline, thereby increasing the company’s compensation for 

the reduction in demand that resulted from switching the lights off during 

the demand-response event. FERC recently approved a $1.3 million 

settlement with the company.63

 

62143 FERC ¶ 61,218, Order Approving Stipulation and Consent Agreement, June 7, 

2013, Docket No. IN12-15-000.

More recently, FERC fined two Maine 

paper mills after concluding that they had manipulated New England’s 

63FERC’s enforcement office identified violations of the RTO tariff and FERC’s 

antimanipulation rule. Furthermore, according to the FERC enforcement order, the 

aggregator received unjust profits. As a condition of the agreement, the aggregator neither 

admitted nor denied these violations but agreed to the penalties imposed by FERC.
 

Page 43 GAO-14-73 Electricity Markets 

demand-response programs.64

Stakeholders we spoke with also highlighted challenges to compensating 

demand-response activities. The stakeholders we spoke with disagreed 

on the value of demand-response activities relative to electricity 

generation and how to compensate consumers for their demandresponse activities. FERC sought to address these challenges in Order 

745, issued in 2011, which provides rules for compensating consumers in 

wholesale energy markets, but it is too soon to tell if this will be 

effective.

In both cases, FERC determined that the 

paper mills had improperly set their baseline electricity usage by lowering 

their use of on-site generation below what was their normal practice. 

According to FERC, doing so increased their consumption of electricity 

from the grid and inflated their baselines. Once the baseline was set, 

FERC determined that the mills returned to their normal practice of using 

their on-site generation, which made it appear that they had taken 

demand-response actions by lowering their use of electricity from the grid. 

FERC recently approved an approximately $3 million settlement with one 

paper mill, and the other case is currently being contested in court. FERC 

officials told us that FERC’s enforcement office continues to pursue 

investigations related to fraudulent demand-response activities. As a 

result of the potential for such manipulations, RTOs and FERC must

devote time and resources toward oversight and enforcement tasks, such 

as monitoring, investigating, and adjudicating potential violations of the 

rules for demand-response activities.

65

Some stakeholders noted that reasonable compensation for demandresponse activities is needed to ensure an appropriate amount of 

participation. If the quantity of electricity reduced as a result of demandresponse activities is too small, the price and reliability benefits that 

demand-response activities provide may be reduced. In contrast, if the 

quantity of electricity reduced as a result of demand-response activities is 

too high, it may dampen the incentives to invest in new power plants, 

which could reduce their availability for meeting demand in the long run. 

 

64In addition, an energy consulting firm and an executive with the consulting firm were 

also charged with fraudulent behavior for their support of one of the paper mills. FERC 

commenced an action in the U.S. District Court for an order affirming a combined penalty 

of $8.75 million.

65Order 745 is currently being contested by a number of electricity stakeholders in the 

U.S. Court of Appeals for the D.C. Circuit. 

Stakeholders Stated That 

Compensating Wholesale 

Demand-Response Activities 

Also Poses Challenges and 

Disagreed about FERC’s 

Approach
 

Page 44 GAO-14-73 Electricity Markets 

Central to the issue of reasonable compensation is the fact that, because 

both demand-response activities and electricity generation from power 

plants can be used to help meet demand for electricity, they compete for 

compensation in the wholesale market.

Some stakeholders told us that they believe that demand-response 

providers should receive less compensation than power plants for the 

services they provide. Specifically, these stakeholders said the following:

• Some stakeholders noted that power plants—assets with long useful 

lives—are more dependable in the long run than demand-response 

resources. For example, these stakeholders told us that owners of 

power plants are typically obligated to ensure that power plants are 

available to generate electricity. In contrast, these stakeholders noted 

that there may not be such a requirement for mandatory participation 

by demand-response providers. For example, representatives from 

one RTO noted that consumers enter into agreements to provide 

demand-response resources through aggregators and may change 

their availability on a month-to-month basis. As a result, they said that 

the RTO is not able to accurately predict how many demand-response 

resources its region will have in the future. In addition, while the 

amount of electricity generation that power plants can generally 

provide is known, there may be limits to how often consumers can be 

requested to curtail their electricity consumption and for how long. For 

example, the market rules for PJM Interconnection’s most widely 

subscribed demand-response program limit PJM’s requests of 

customers for demand-response activities to no more than 10 

interruptions from June through September with a maximum 

interruption of 6 hours. Representatives from PJM Interconnection told 

us they are attempting to increase the use of demand-response 

approaches with fewer restrictions.66

• Several stakeholders noted that providing equal compensation for

demand-response activities as electricity generation may result in 

benefits to demand-response providers in excess of what would be 

economically justified. Several stated that, in their view, if these 

resources are compensated equally, the providers are effectively 

benefitting twice—once when they are paid for their demand-response 

 

66According to a PJM representative, beginning on June 1, 2014, two additional demandresponse programs with fewer limitations will be available. 
 

Page 45 GAO-14-73 Electricity Markets 

activities and a second time because they save money by not having 

to purchase as much electricity as they were originally planning to. 

One stakeholder noted that while it may be reasonable to provide 

compensation to demand-response providers at a level equal to 

power plants if the providers had first purchased the electricity and 

were just reselling it, demand-response providers may have not done 

so. In essence, demand-response providers may be compensated for 

agreeing to reduce their use of electricity that they may not have 

purchased in the first place. Some stakeholders noted that providing 

equal compensation could result in more demand-response resources 

than are economically justified.

Some stakeholders told us they believe that demand-response providers 

should receive compensation equal to the compensation power plants 

receive for generating electricity. Specifically, stakeholders said the 

following:

• Some stakeholders noted that providing equal compensation can 

encourage demand-response resources to participate in wholesale 

markets in which they provide benefits. According to one stakeholder, 

demand-response activities can provide reliability benefits, including 

addressing localized reliability concerns. Localized reliability concerns 

sometimes arise when the transmission lines leading to a local area 

do not have the capability to transport sufficient electricity for that 

area. Even though adequate electricity is available to meet overall 

demand, there may not be sufficient transmission available to deliver 

the electricity at certain points during the day or year. One stakeholder 

told us that, in these instances, the demand-response activities of 

consumers living in the local area could help resolve the reliability 

concern. Two other stakeholders—a representative of a demandresponse aggregator and a state public utility commission official—

told us that, without equal compensation, the quantity of demandresponse activities in the wholesale energy markets would likely be 

smaller.

• Some stakeholders told us that, although demand-response activities 

and electricity generation are different kinds of resources, providing 

equal compensation is appropriate since demand-response activities 

provide a benefit to the market by replacing the need to have power 

plants provide additional electricity. One stakeholder said that equal 

compensation always provides an economic benefit to consumers 

since FERC requires demand-response activities to be cost-effective. 

This means that the estimated benefit from the reduction of the 

wholesale market price attributable to demand-response activities 
 

Page 46 GAO-14-73 Electricity Markets 

should be greater than the amount of compensation paid for the 

demand-response activities. Another stakeholder noted that equal 

compensation in electricity markets is designed to provide a 

competitive price that balances supply and demand in the 

marketplace in an unbiased manner. The purpose of equal 

compensation is not to provide equal benefit to all resources, since 

each resource—including power plants with different fuel types—has 

varying costs and will, therefore, benefit from equal compensation to 

varying degrees.

In 2011, FERC issued Order 745 generally requiring that, when certain 

conditions are met, demand-response providers should receive equal 

compensation. Prior to issuance, FERC issued a Notice of Proposed 

Rulemaking and provided an opportunity for the public to comment. In the 

final order, FERC acknowledged divergent opinions on the appropriate 

level of compensation, but it determined that equal compensation should 

generally be provided for demand-response activities that provide the 

same services as generation. It may take time to determine whether 

Order 745 will have the desired effect.

Stakeholders identified the following two additional challenges that have 

developed related to demand-response efforts:

• Environmental impacts of backup or replacement generation.

67

 

67Demand-response activities can result in environmental benefits; however, determining 

the net environmental benefits of demand-response activities was beyond the scope of 

this report. In general, the extent of environmental benefits depends on many factors, for 

example, whether electricity use is reduced outright or shifted to other hours. In addition, 

whether consumers use backup generators to offset their reductions in electricity use, will 

also affect environmental benefits.

Some stakeholders highlighted challenges associated with the use of 

backup generators for demand-response activities. Some consumers 

may use backup generators—on-site generating units that replace 

electricity that would have been provided by the grid—to generate 

electricity to offset some or all of their demand reductions. Although 

these backup generators can play an important role in maintaining 

reliability, they may be more polluting than the power plants serving 

the grid. EPA officials told us that they did not know the environmental 

impact of backup generation being used to offset demand-response 

activities and said that the impact will depend on how often backup 

Stakeholders Identified 

Two Additional Challenges 

as a Result of DemandResponse Efforts
 

Page 47 GAO-14-73 Electricity Markets 

generators are used for this purpose and their individual emissions 

profiles. According to an EPA final rule, starting with calendar year 

2015, owners and operators of backup generators subject to EPA’s 

rules must annually report data on the extent to which their generators 

are used for demand-response activities.68

• Demand-response dependability. As demand-response activities 

increase and become a larger percentage of overall system demand, 

the likelihood increases that a consumer will be called upon more 

often for their demand-response activities. Some stakeholders noted 

that consumers may become fatigued as the number of demandresponse events increases, making them less likely to reduce 

electricity demand to agreed-upon levels. NERC has recently begun 

taking steps to collect data about this issue.69

Retail prices, which are outside of FERC’s jurisdiction, remain largely 

unresponsive to wholesale market conditions, which poses challenges in 

wholesale markets. These unresponsive retail prices limit the potential for 

consumers to respond to changes in the cost of producing electricity or 

prices in wholesale markets which, in turn, leaves electricity consumption 

and wholesale prices higher than they otherwise would be. In our 2004 

report,70 we reported that a barrier to demand-response activities is that 

retail electricity prices generally did not vary with wholesale market 

conditions—such as changing demand for electricity and the cost of 

serving consumers—but were instead based on average electricity costs 

over an extended period.71

 

68National Emission Standards for Hazardous Air Pollutants for Reciprocating Internal 

Combustion Engines; New Source Performance Standards for Stationary Internal 

Combustion Engines; Final Rule, 78 Fed. Reg. 6674 (Jan. 30, 2013), codified at 40 C.F.R. 

Parts 60 and 63. 

In particular, in 2004, we concluded that retail 

69NERC is collecting this data through its Demand Response Availability Data System 

initiative. 

70GAO-04-844. 

71Under the basic model for designing unvarying, average retail electricity prices, all the 

costs of producing electricity are combined. The resulting amount is divided among 

various classes of consumers, for example, industrial, commercial, and residential 

consumers, and consumers within each class pay an unvarying, averaged price 

regardless of when their electricity consumption occurs. This leads to some consumers 

paying more and others less than the actual cost of serving them.

Retail Prices Remain 

Unresponsive to Market

Conditions, which Poses 

Challenges in Wholesale 

Markets, Including Higher 

Demand and Prices
 

Page 48 GAO-14-73 Electricity Markets 

prices that did not vary with wholesale market conditions resulted in 

electricity markets that do not work as well as they could, producing 

prices that are higher than they would be if more consumers paid varying 

prices. Since that time, others have also concluded that having a limited 

number of consumers paying prices that are responsive to market 

conditions may lead to higher consumer demand for electricity than would 

otherwise be the case. Specifically, according to a 2008 FERC report 

about demand-response activities, some stakeholders, and other reports 

we reviewed, consumers paying average, unvarying prices may use more 

electricity at times of the day when the cost of serving consumers is high 

than they would if the price they paid reflected this higher cost of serving 

them.72

FERC has also concluded that prices that are aligned with overall market 

conditions could provide substantial benefits. For example, in a 2009 

assessment of demand-response potential, FERC estimated that 

forecasted peak demand in 2019 could drop by 14 percent if two types of 

consumer-initiated demand-response approaches—real-time prices and 

critical-peak prices—became the default pricing approach for 

consumers.

More recently, some stakeholders we spoke with and reports we 

reviewed also concluded that if consumers’ electricity use is higher than it 

otherwise would be, electricity prices for all consumers will also be higher. 

Furthermore, two stakeholders and reports we reviewed noted that higher 

levels of consumption must be served by building additional power plants 

and transmission lines, which further drives up costs and ultimately retail 

prices paid by consumers.

73 Consistent with this view, some stakeholders we 

interviewed, reports by economists, and a FERC Advance Notice of 

Proposed Rulemaking,74

 

72FERC, Assessment of Demand Response and Advanced Metering (December 2008).

reported that increasing the number of 

73Under this scenario, FERC estimated that advanced metering infrastructure was 

universally deployed, and consumers, by default, paid real-time or critical-peak prices. 

Additionally, FERC estimated that other demand-response programs were available to 

consumers who opted-out of the above pricing approaches. FERC compared the results 

of this scenario with one in which no customers participated in demand-response 

programs. 

74Advance Notice of Proposed Rulemaking. Wholesale Competition in Regions with 

Organized Electric Markets, RM07-19-000 and AD07-7-000 (Jun. 22, 2007). According to 

FERC, “where a load serving entity offers retail customers some form of time-of-use rates, 

the retail customers’ response to rates during a higher-priced period reduces the load 

serving entities’ wholesale demand and helps lower wholesale prices.” 
 

Page 49 GAO-14-73 Electricity Markets 

consumers enrolled in consumer-initiated demand-response approaches, 

particularly real-time pricing programs, has the potential to lower average 

electricity prices for all consumers as well as provide other benefits. For 

example, such an approach could eliminate “cross subsidies” in which 

one type of consumer—consumers that currently use little electricity at 

high-cost times—subsidizes the behavior of other consumers—those that 

use larger amounts of electricity at high-cost times. In addition, such an 

approach could provide consumers with the incentive to make more 

permanent shifts in the way they consume electricity, such as by making 

changes to electricity consumption habits, including precooling buildings 

prior to peak hours rather than cooling continuously throughout the day.

We also previously reported that such pricing can provide incentives for 

the installation of more energy efficient equipment to replace equipment 

that consumes large quantities of electricity during periods of high 

demand, such as air conditioners that run during peak periods during the 

summer.75

In particular, FERC’s data indicate that 6.5 percent of retail consumers 

participate in demand-response programs and approximately 2 percent in 

consumer-initiated approaches such as time-of-use or real-time pricing.

Some stakeholders we spoke to told us that expanding the number of 

consumers paying prices that are responsive to market conditions—such 

as real-time prices—would be a more straightforward and less 

administratively costly alternative to FERC’s demand-response efforts.

Such pricing may also make it cost-effective for some 

consumers to invest in renewable energy technologies such as solar 

panels. The times solar power can be generated often coincide with times 

of peak demand, when the cost of generating electricity is higher, which 

may make the use of solar panels more cost-effective when consumers 

pay real-time prices.

Some stakeholders highlighted the difficulties of shifting retail pricing 

toward prices that more closely mirror the cost of serving consumers. For 

example, representatives from a large industrial company told us that it is 

difficult to manage their operations when paying prices that vary 

frequently throughout the day because electricity comprises a large 

portion of this company’s business expenses, and frequently varying 

prices make it difficult to plan production cycles. Two other stakeholders 

commented that if consumers’ expected cost savings from shifting their 

 

75GAO-04-844. 
 

Page 50 GAO-14-73 Electricity Markets 

electricity use are small, they may decide that it is not worth the effort to 

shift their electricity use in response to changing prices. When making 

this determination, consumers may consider the costs associated with 

managing their electricity usage in response to prices that vary frequently, 

including the costs of installing any needed technological infrastructure—

for example, energy management control systems that allow them to 

automatically respond to varying prices with preprogrammed demandresponse curtailment actions.

Efforts are under way in several areas to evaluate different ways of 

pricing electricity for retail consumers with some utilities initiating pilots. 

For example, Baltimore Gas and Electric completed a pilot program—

converted to a permanent program in July 2013—in which residential 

consumers earn a bill credit for energy conserved compared with their 

normal usage on days identified by the utility when energy demand is 

high. Furthermore, Pacific Gas and Electric, which serves much of 

Northern and Central California, began offering a critical peak pricing 

program in 2008 after advanced meters had been installed. Additionally, 

as a part of the DOE Smart Grid Investment Grant program, DOE is 

helping to coordinate studies to assess consumers’ responses to these 

new approaches.

Since our last report on demand-response activities in 2004, FERC has 

made efforts to remove barriers to expand the use of demand-response 

activities in wholesale markets, recognizing the importance of connecting 

consumers’ decisions about electricity consumption to the wholesale 

markets FERC oversees. FERC has also undertaken efforts to study 

demand-response activities and collect data on the range of demandresponse activities across the United States and report them annually, as 

required under the Energy Policy Act. However, the data FERC collects 

and reports—the only source of broad data we identified with detailed 

information by demand-response approach—have two key limitations. 

First, FERC has not reviewed the scope of its data collection and 

reporting efforts to determine whether they could be improved to better 

reflect changes in electricity markets and participation in demandresponse activities. Second, in some cases, FERC makes certain 

adjustments after collecting these data but before using them in their 

reports required by Congress; however, it does not fully document these 

adjustments or the reasons for them. By taking steps to address these 

limitations, FERC could make its data more informative and transparent 

to data users and ensure that Congress has a better picture of demandresponse activities—something it sought in the Energy Policy Act. 

Conclusions
 

Page 51 GAO-14-73 Electricity Markets 

Improvements in its data collection and reporting process could also 

benefit regulators—such as FERC and state regulators—in determining 

how to focus their demand-response efforts.

We are making recommendations to improve the quality of FERC’s 

annual reports required by Congress on demand-response and advanced 

metering activities and the data collected to support these reports. In 

particular, we recommend that the Chairman of FERC take the following 

two actions:

• Review the scope of FERC’s efforts to prepare and publish an annual 

report that assesses demand-response resources and consider 

whether revisions to the data it collects could better inform users and 

improve the effectiveness of demand-response activities.

• Take steps to ensure that FERC staff fully document any 

modifications made to survey data prior to public reporting, including 

considering making its final, modified data set available to the public.

We provided a draft of this report to FERC for review and comment, and 

FERC provided written comments, which are reproduced in appendix III. 

In its comments, FERC did not disagree with our findings or 

recommendations and stated that it would take them under advisement 

as it considers how best to fulfill the requirements of the Energy Policy 

Act of 2005. We believe in the importance of fully implementing these 

recommendations. FERC also provided technical comments, which we 

incorporated, as appropriate. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Chairman of FERC, 

the appropriate congressional committees, and other interested parties. In 

addition, this report will be available at no charge on the GAO website at 

http://www.gao.gov. 

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 52 GAO-14-73 Electricity Markets 

If you or your staff members have any questions about this report, please 

contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix VI.

Frank Rusco

Director, Natural Resources and Environment
Appendix I: Objectives, Scope, and 

Methodology

Page 53 GAO-14-73 Electricity Markets 

This report examines efforts to expand demand-response activities in the 

U.S. electricity markets and provides an update on the status of demandresponse activities since we previously reported on them in 2004. 

Specifically, this report assesses: (1) the federal government’s efforts to 

facilitate demand-response activities; (2) Federal Energy Regulatory 

Commission (FERC) efforts to collect and report data on demandresponse activities; (3) changes, if any, in the extent of demand-response 

activities in retail and wholesale markets; and (4) key benefits and 

challenges, if any, of current demand-response efforts.

To assess the federal government’s efforts to facilitate demand-response 

since our 2004 report, we reviewed federal demand-response policies 

and interviewed officials from FERC, the Department of Energy (DOE), 

and the Environmental Protection Agency (EPA), key agencies involved 

in demand-response policy setting. These policies included FERC 

demand-response orders that summarize FERC’s review of demandresponse proposals from individual Regional Transmission Organizations 

(RTO), as well as FERC orders that address demand-response activities 

more broadly. We also spoke with FERC officials to understand their 

current approach to demand-response activities in wholesale markets, 

including decisions about how to eliminate barriers to demand-response 

activities in these markets. We reviewed relevant laws that outlined 

requirements related to demand-response efforts for FERC and others.

To assess FERC’s efforts to collect and report data on demand-response 

activities, we reviewed FERC’s approach to gathering data for its 

Assessment of Demand Response and Advanced Metering reports, 

which involved analyzing various aspects of the data, analyzing FERC’s 

approach for collecting and modifying the data, and conducting interviews 

with FERC officials about FERC’s data collection and reporting process.

To assess the changes, if any, in the extent of demand-response 

activities in retail and wholesale markets since 2004, we reviewed and 

analyzed data on demand-response activities from FERC and the Energy 

Information Administration (EIA), among others. Specifically, we reviewed 

FERC data on demand-response approaches and related reports, 

including FERC’s 2012 Assessment of Demand Response and Advanced 

Metering report. Where appropriate, we used these data in our report to 

provide information on how overall levels of demand-response activities 

have changed over time. We also analyzed data from FERC’s survey of 

utility demand-response activities conducted for this 2012 assessment to 

identify the primary demand-response approaches in use at the retail 

level. FERC conducted a voluntary survey of utilities to gather data on 

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 54 GAO-14-73 Electricity Markets 

their demand-response activities and their use of advanced meters. The 

response rate to FERC’s survey was 59 percent. Unless otherwise noted, 

the data we present in our report from FERC’s 2012 report and 

associated survey reflects information reported by those utilities 

responding to the survey. The data do not represent the extent of 

demand-response activities throughout the United States. Furthermore, 

our analysis of survey results to identify the primary demand-response 

approaches at the retail level may not match what was reported in 

FERC’s 2012 Assessment of Demand Response and Advanced Metering

report because FERC modified these data prior to publication, as we 

discuss in this report. Because these modifications were not documented, 

we could not verify their accuracy or relevance to our analysis. As a 

result, when providing data about specific retail demand-response 

approaches, we chose to report results from the original survey data 

reported by the utilities, which reflect the original, unmodified survey 

responses. To assess the reliability of the data, we interviewed FERC 

officials and performed electronic testing of the data. We found some 

elements of the data to be sufficiently reliable for our purposes. In other 

cases, we were unable to determine the quality of the data and, therefore, 

did not include related analyses in our report. In addition to the FERC 

data, we reviewed EIA’s 2011 data on retail demand-response activities. 

We reviewed related documentation about these data and interviewed 

EIA about their collection, and we found them to be sufficiently reliable for 

our purposes. We also reviewed data collected by the North American 

Electric Reliability Corporation (NERC) through its Demand Response 

Availability Data System. These data primarily focused on operatorinitiated approaches, although a report from NERC says there are plans 

to expand reporting to include additional consumer-initiated approaches 

in the future. For this reason, and because the data were not categorized 

in a way that aligned with the specific analysis we were performing, we 

did not include them in our report.

We also reviewed RTOs’ data on the development of demand-response 

activities in their region, what consumers provide demand-response 

activities, and documentation on available RTO demand-response 

approaches. We supplemented these data with our own analysis of data 

on RTO demand-response resources available through the FERC survey 

of utility demand-response activities. To analyze the FERC data, we 

categorized each RTO’s demand-response resources according to 

whether they were designed to provide capacity, energy, or ancillary 

services and confirmed these categorizations with the RTOs. In some 

cases, RTO demand-response approaches had been updated or 

changed by the RTOs since this information was reported to FERC. 
Appendix I: Objectives, Scope, and 

Methodology

Page 55 GAO-14-73 Electricity Markets 

Additionally, FERC took various steps to modify reported categories prior 

to reporting similar information in their 2012 Assessment of Demand 

Response and Advanced Metering report. As previously noted, because 

these modifications were not documented, we were unable to verify their 

appropriateness for inclusion in our analysis. As such, for this analysis of 

RTO demand-response activities, we primarily used the original survey 

data reported on FERC’s website. In the case of the Midcontinent 

Independent System Operator data, FERC informed us that the data 

reported on its website was not correct and provided us with the corrected 

survey data. We interviewed FERC officials about their data and 

performed electronic testing of the data, which we found sufficiently 

reliable for our purposes. As a result, the data included in our report may 

not always match what was reported in FERC’s 2012 Assessment of 

Demand Response and Advanced Metering report.

To assess key benefits and challenges, if any, of current demandresponse efforts, we conducted semistructured interviews with a 

nonprobability sample of 37 diverse stakeholders with expertise on 

demand-response issues from five categories: trade associations and 

public interest organizations; academics and consultants; state 

government, including state public utility commissions; industry, including 

demand-response aggregators, large users of electricity, independent 

power producers, and integrated utilities; and RTOs. (See app. II for a list 

of these stakeholders). We selected these groups to maintain balance on 

key issues. Often, because of business interests, these groups have 

different perspectives on electricity industry issues, including demandresponse activities. When possible, we used a standard set of questions 

to discuss topics such as the strengths and limitations of U.S. demandresponse approaches, barriers to expanding demand-response activities, 

and steps the federal government should take to develop or refine 

demand-response policies. However, as needed, we also sought 

perspectives on additional questions tailored to these stakeholders’ area 

of expertise and sought opinions from stakeholders on controversial key 

issues, for example, their views on how to best compensate consumers 

for their demand-response activities. In addition to interviewing the 

aforementioned 37 stakeholders from the five categories, we had 

supplementary conversations with stakeholders who did not easily fit in 

one of the previous five categories. These stakeholders had specialized 

knowledge about certain aspects of the electricity industry relevant to our 

study, for example, experience evaluating the competitiveness of the 

FERC-regulated wholesale markets. In total, we spoke with 42 

stakeholders as outlined in appendix II. Throughout the report we use the 

indefinite quantifiers, “some,” “several,” and “many” to inform the reader 
Appendix I: Objectives, Scope, and 

Methodology

Page 56 GAO-14-73 Electricity Markets 

of the approximate quantity of stakeholders that agreed with a particular 

idea or statement. We refer to “some” as 3-6 stakeholders, “several” as 7-

12 stakeholders, and “many” as 12-27 stakeholders. Because this was a 

nonprobability sample, the information and perspectives that we obtained 

from the interviews cannot be generalized to similar groups of 

stakeholders. Such an approach, however, allowed us to get more in 

depth responses about certain key issues related to our objectives, 

including the connection between retail electricity prices and the cost of 

serving consumers. We also reviewed current reports—including 

empirical studies—on demand-response issues. We identified these 

reports during the course of our own research, by recommendation from 

stakeholders, and through a literature review of retail and wholesale 

demand-response approaches.

We conducted this performance audit from September 2012 to March 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Stakeholders Interviewed

Page 57 GAO-14-73 Electricity Markets 

• American Public Power Association

• Compete Coalition

• Demand Response and Smart Grid Coalition

• Edison Electric Institute

• Electricity Consumers Resource Council

• Electric Power Supply Association

• ISO/RTO Council

• National Association of Regulatory Utility Commissioners

• The National Rural Electric Cooperative Association

• Public Citizen

• The Brattle Group

• Charles Goldman, Lawrence Berkeley National Laboratory

• NERA Economic Consulting

• Dr. Frank Wolak, Stanford University

• Dr. Jay Zarnikau, University of Texas at Austin

• Illinois Commerce Commission

• Maryland Office of People’s Counsel

• Maryland Public Service Commission

• Pennsylvania Public Utility Commission

• Public Utility Commission of Texas

• EnerNOC

• Energy Curtailment Specialists

• CBRE

• Gerdau Corporation

• Linde Energy Services

• American Electric Power

• Calpine

• CPS Energy

• Exelon Corporation

• Southern Company

• California Independent System Operator

• Electric Reliability Council of Texas

• ISO New England

• Midcontinent Independent System Operator

• New York Independent System Operator

• PJM Interconnection

• Southwest Power Pool

Appendix II: Stakeholders Interviewed

Trade Associations and 

Public Interest 

Organizations

Academics and 

Consultants

State Government

Industry

RTOs
Appendix II: Stakeholders Interviewed

Page 58 GAO-14-73 Electricity Markets 

• Scott Hempling

• Monitoring Analytics

• Potomac Economics

• North American Electric Reliability Corporation

• Vermont Energy Investment Corporation

Others
Appendix III: Comments from the Federal 

Energy Regulatory Commission

Page 59 GAO-14-73 Electricity Markets 

Appendix III: Comments from the Federal 

Energy Regulatory Commission
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 60 GAO-14-73 Electricity Markets 

Frank Rusco, 202-512-3841 or ruscof@gao.gov

In addition to the individual named above, Jon Ludwigson (Assistant 

Director), Margaret Childs, Alysia Davis, Philip Farah, Cindy Gilbert, 

Paige Gilbreath, Catherine Hurley, Alison O’Neill, Dan C. Royer, Kiki 

Theodoropoulos, and Barbara Timmerman made key contributions to this 

report.

Appendix IV: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(361440)
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