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Essential Energy Insights - October 2021


FERC hears lively debate on state-level demand response bans

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Third-party demand response aggregators are prohibited from participating in wholesale electricity markets in more than a dozen U.S. states.
Source: eyecrave/Getty Creative via Getty Images

Public interest groups and clean energy advocates are urging the Federal Energy Regulatory Commission to eliminate a long-standing opt-out provision in its landmark demand response rule as states and grid operators seek to comply with a more recent regulation opening wholesale electricity markets to aggregations of distributed energy resources.

But state utility commissions, investor-owned utilities, municipal utilities and rural electric cooperatives are warning that doing so could complicate efforts to comply with the distributed energy rule.

FERC's evolving policies

At issue is a state opt-out provision in Order 719, a final rule issued by FERC in 2008 that enabled demand-side resources, such as large industrial customers and aggregations of residential customers in the PJM Interconnection, ISO New England and New York ISO, to receive wholesale market compensation for curtailing electricity consumption in response to price signals.

However, Order 719 allows grid operators to reject bids from third-party demand response aggregators in states or localities with rules that prohibit those types of aggregations. In affirming the rule, the U.S. Supreme Court in 2016 cited the state opt-out provision as an example of cooperative federalism under the Federal Power Act, but its ruling did not hinge on that part of the regulation.

Meanwhile, FERC did not include a state opt-out provision in a January 2018 rule, Order 841, opening wholesale power markets to energy storage resources. That decision was eventually upheld by the U.S. Court of Appeals for the District of Columbia Circuit, which deferred to FERC's reasoning that the costs of giving states an opt-out would have outweighed Order 841's benefits.

FERC in September 2020 also declined to add a state opt-out provision to a similar rule — Order 2222 — for distributed energy resources, such as residential batteries or small-scale solar arrays. However, FERC said Order 719's state opt-out provision still applies to distributed energy resource aggregations that include demand response resources.

Voltus Inc., a leading third-party demand response aggregator, subsequently filed a complaint (EL21-12) with the commission in October 2020 arguing that the state opt-out provision in Order 719 is inconsistent with Order 841 and Order 2222. Voltus also noted that all but three out of 15 states participating in the Midcontinent ISO have passed laws or regulations restricting third-party demand response aggregations since Order 719 was issued.

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In March, FERC launched a notice of inquiry (RM21-14), or NOI, into whether it should direct grid operators to effectively ignore state-level rules barring third-party demand response aggregators in response to Order 719.

With that inquiry pending, FERC in June revisited Order 2222 and set aside its determination that state opt-out rules for demand response resources do not apply when such a resource joins with aggregations of other distributed energy resources. FERC said it will wait to assess the comments filed in response to the NOI to decide whether state opt-out rules for a separate demand response rule still make sense.

'Taking away authority'

In its comments on the NOI, the National Association of Regulatory Utility Commissioners argued that the elimination of Order 719's state opt-out provision will only frustrate efforts by states and regional grid operators to comply with Order 2222, which it said will require significant coordination between state utility commissions and regional grid operators.

"Eliminating the demand response opt-out would mean that the commission is taking away authority from the states that employed the demand response opt-out and built a legal framework for that regulatory scheme," NARUC said. "These states would have to expend their limited resources to dismantle that framework, in addition to addressing the challenges of implementing" Order 2222.

The Michigan Public Service Commission, one of more than a half-dozen individual state utility commissions to file comments, reported that the opt-out provision has allowed the state to gradually enable more demand response resources as the MISO market evolves.

MISO now has approximately 11,000 MW of demand response resources designated as load modifying resources, representing approximately 8.6% of the grid operator's peak demand. However, those resources are only available during grid emergencies.

Nevertheless, the Edison Electric Institute noted that retail rates in some states have been structured to account for residential demand response in vertically integrated utilities' long-term planning processes. That allows those companies to procure less power generating capacity, EEI said. The trade group recommended that FERC, at a minimum, grandfather states that have enacted "state policies and programs in reliance upon the opt-out provided in Order 719."

In urging FERC to maintain the opt-out, MISO noted that the largest cost and burden associated with eliminating it would be "the potential for double-counting, with aggregators and [load-serving entities] claiming the same end-use customer behind the demand response asset."

The American Public Power Association and National Rural Electric Cooperative Association jointly urged FERC to ensure that its actions do not "interfere with the operation of successful demand response programs, place an undue burden on state and local retail regulatory authorities, or raise new concerns regarding federal and state jurisdiction."

'Artificial and unduly discriminatory barriers'

Conversely, a coalition of environmental and public interest organizations, including the Natural Resources Defense Council and the Sierra Club, argued that the state opt-out provision in Order 719 has produced rates that are no longer just and reasonable under the Federal Power Act.

"Eliminating the [opt-out provision] would have the benefit of improving market participation options for customers, which will ultimately enhance both bulk power system and distribution system reliability, as well as lowering both wholesale and retail rates," the groups asserted.

In doing so, the organizations noted that recent retail sales data for large electric utilities in the MISO footprint indicate that state-level bans are blocking approximately 15 million customers from potentially participating in competitive demand response aggregations at the wholesale level.

Advanced Energy Economy, an organization representing clean energy interests, also predicted that the opt-out provision will "stymie the ability for demand response aggregators to deploy technology and acquire more customers to provide the balancing services that will be necessary in a high renewable energy future."

And the Electricity Consumers Resource Council, a national association representing large industrial consumers, asserted that the opt-out provision has become outdated as FERC's regulations for energy storage and distributed energy resources have evolved.

The state-level opt-out "now creates artificial and unduly discriminatory barriers to demand response participation by retail customers in the wholesale electricity markets, and the result — where the state opt-out persists — is wholesale market inefficiency, inaccurate measures of resource adequacy, lack of operational flexibility, and inflated wholesale electricity market prices," the association said.