Electricity Markets: Demand-Response Activities Have Increased, but FERC Could Improve Data Collection and Reporting Efforts
Published: 2014-03-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 demand-response activities. This report provides an update since 2004 and discusses: (1) federal efforts to facilitate demand-response activities, (2) FERC efforts to collect and report data on demand-response 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.
section_title: What GAO Found
paragraphs: 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.
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: 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.  Given its importance, the price and reliability of electricity can have  substantial impacts on consumers and the broader economy.
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  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.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.
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 market- based, 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. discriminatory or preferential.” 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.
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). actions they take to use less electricity than expected during periods of  peak demand.
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).  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; and (3) consumers’ limited awareness of demand- response 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.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 demand- response 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   The act  demand-response could provide a way to mitigate potential reliability  impacts of these actions.
In this context, you asked us to examine U.S. efforts to expand demand- response 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 demand- response activities; (2) FERC efforts to collect and report data on  demand-response 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 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 demand- response 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  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.
subsections: section_title: Background
paragraphs: 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 demand- response approaches.
subsections: section_title: Balancing Supply and Demand in Regional Electricity Systems
paragraphs: 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.
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  the night and early morning hours. In addition to these daily variations in  demand, electricity demand varies seasonally, mainly because air- conditioning 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. 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. 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   This  demand during peak periods have a significant economic impact.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.
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.
section_title: Restructuring of the Electricity Sector and the Expanding Role of Competition and Markets
paragraphs: 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  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. 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. 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.
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  out by local utilities. 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.
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  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.
section_title: Two Key Demand- Response Approaches
paragraphs: 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. 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.demand-response activities generally declined between 1998 and 2003,  just as FERC was beginning to restructure wholesale electricity markets.
However, according to data from NERC, estimates of certain  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) consumer- initiated and (2) operator-initiated. Specifically, these approaches are as  follows:
Consumer-initiated approaches. With consumer-initiated demand- response 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. Time-based prices include time-of-use prices, which  vary at broad intervals, such as peak and off-peak times, and real- time 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.
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.
section_title: The Federal Government Has Made Efforts to Facilitate Demand- Response Activities, Including Expanding Their Use in Wholesale Markets
paragraphs: 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.
subsections: section_title: DOE and FERC Have Taken Certain Actions to Help Address Barriers to Expanding Demand- Response Activities
paragraphs: 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. 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  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.
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   In 2006,  compatible policies regarding demand-response activities. FERC and the state public utility commissions—through the National  Association of Regulatory Utility Commissionerscoordinate 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.
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 demand- response activities, and with DOE, develop a proposal to implement the  National Action Plan. 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   compared with a scenario with no  reduced by 188 gigawatts (GW)
Energy Independence and Security Act of 2007, Pub. L. No. 110-140, §529, 121 Stat.  1492, 1664-65 (codified at 42 U.S.C. § 8279). demand-response activities within 10 years. This reduction is equal to  approximately 2,500 peaking power plants. 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. 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.
section_title: FERC Has Approved the Use of More Demand- Response Activities in RTO Markets
paragraphs: 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. FERC has  also reported that electricity markets are more effective when retail rates  vary with the cost of serving consumers. 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. 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.
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  limited use. 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.
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. 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  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,   demand- according to documentation from PJM Interconnection,response resources are used to provide each of the three services within  PJM Interconnection. Specifically, these services are as follows:
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. Demand- response resources may be scheduled if they are among the least  costly options for addressing energy needs at a particular location.
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.
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-to- moment basis.
section_title: FERC Has Taken Recent Steps to Make Demand- Response Rules More Consistent
paragraphs: 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.
These orders have addressed several aspects of demand-response  activities. For example, in Order 676-G, FERC adopted standards  established by the North American Energy Standards Board that provide  detailed guidance about quantifying consumers’ demand-response  activities. 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.
section_title: FERC Collects Data and Reports on Demand-Response Activities, but These Efforts Have Limitations
paragraphs: Since 2006, FERC has taken steps to collect data and report on demand- response 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.
subsections: section_title: FERC Has Taken Steps to Collect and Report Data on Demand-Response Activities
paragraphs: 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. 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 demand- response activities and advanced metering based on this survey and  other sources in its annual report. 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), by  market (e.g., wholesale and retail), and, for retail demand-response  activities, by class (e.g., commercial, industrial, and residential). The  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.
section_title: FERC Has Not Reviewed the Scope of Its Data Collection and Reporting
paragraphs: 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 demand- response 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  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.
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  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. 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.
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.
We have previously reported that evaluation can play a key role in  program management and oversight—including evaluation of activities  with an identifiable purpose. 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 demand- response 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  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.
section_title: FERC Does Not Fully Document Adjustments It Makes to Its Data
paragraphs: 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  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 demand- response activities.
section_title: Demand-Response Activities Have Increased Overall, but Their Characteristics Have Varied
paragraphs: 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, or about 8.5  percent of the peak U.S. demand in 2011. 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. 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.
subsections: section_title: Demand-Response Activities in Retail Markets Have Increased Overall, but Consumer Type and Approaches Varied
paragraphs: 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). 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   Demand-response activities  potential for 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.
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.
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. Of these 8.5 million consumers,  approximately 6.0 million (71 percent) participated in programs that used  operator-initiated approaches. 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).consumers participate in two key operator-initiated approaches.
section_title: Wholesale Demand- Response Activities Have Increased Overall and Have Varied by Region and the Service Provided
paragraphs: 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.
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. 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.
section_title: Demand-Response Efforts Have Resulted in Benefits, but Current Efforts Continue to Pose Challenges in Wholesale Markets
paragraphs: 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 demand- response 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.
subsections: section_title: Stakeholders Identified Examples of Benefits Provided by Demand- Response Efforts
paragraphs: Stakeholders we interviewed identified examples of how demand- response 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 demand- response 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— 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, demand- response 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; 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.
section_title: 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
paragraphs: 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.
subsections: section_title: Stakeholders Stated That Quantifying Wholesale Demand-Response Activities Poses Two Key Challenges That Require Time and Resources to Address
paragraphs: 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 demand- response 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,  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 demand- response 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 demand- response event was scheduled to begin. 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. More recently, FERC fined two Maine  paper mills after concluding that they had manipulated New England’s  demand-response programs.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.
section_title: Stakeholders Stated That Compensating Wholesale Demand-Response Activities Also Poses Challenges and Disagreed about FERC’s Approach
paragraphs: 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 demand- response 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.
Some stakeholders noted that reasonable compensation for demand- response activities is needed to ensure an appropriate amount of  participation. If the quantity of electricity reduced as a result of demand- response 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.
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.
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  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 demand- response aggregator and a state public utility commission official— told us that, without equal compensation, the quantity of demand- response 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  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.
section_title: Stakeholders Identified Two Additional Challenges as a Result of Demand- Response Efforts
paragraphs: Stakeholders identified the following two additional challenges that have  developed related to demand-response efforts:
Environmental impacts of backup or replacement generation.
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  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.
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 demand- response 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.
section_title: Retail Prices Remain Unresponsive to Market Conditions, which Poses Challenges in Wholesale Markets, Including Higher Demand and Prices
paragraphs: 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, 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   In particular, in 2004, we concluded that retail  over an extended period.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   More recently, some stakeholders we spoke with and reports we  them.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.
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. Consistent with this view, some stakeholders we  interviewed, reports by economists, and a FERC Advance Notice of  Proposed Rulemaking, reported that increasing the number of  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. 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.
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.
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  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 demand- response 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.
section_title: Conclusions
paragraphs: 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 demand- response 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 demand- response 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 demand- response activities—something it sought in the Energy Policy Act.
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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines efforts to expand demand-response activities in the  U.S. electricity markets and provides an update on the status of demand- response 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 demand- response 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 demand- response 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  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 operator- initiated 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.
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 demand- response 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 demand- response activities. When possible, we used a standard set of questions  to discuss topics such as the strengths and limitations of U.S. demand- response 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  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.
section_title: Appendix II: Stakeholders Interviewed
subsections: section_title: Trade Associations and Public Interest Organizations
section_title: Academics and Consultants
section_title: State Government
section_title: Industry
section_title: Others
section_title: Appendix III: Comments from the Federal Energy Regulatory Commission
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.