FERC denies PJM market monitor’s complaint regarding demand response

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FERC, in an April 21 order, denied a January 2014 complaint filed by Monitoring Analytics, the independent market monitor for PJM Interconnection, in which the market monitor alleged that PJM’s existing capacity market rules fail to treat demand response resources in a manner comparable to generation capacity resources.

FERC Commissioner Tony Clark issued a statement dissenting in part.

FERC said that it finds that the complaint fails to satisfy its burden under Federal Power Act's section 206 to show that PJM’s existing tariff is unjust, unreasonable, unduly discriminatory or preferential. The crux of the complaint is that demand response resources and generation resources must be treated identically in PJM’s energy market, FERC said.

“Specifically, the market monitor argues that a day-ahead energy market must-offer requirement and a default offer cap must be imposed on capacity demand response resources that have cleared in PJM’s capacity market auction in order to treat these resources on a fully comparable basis relative to generation capacity resources,” FERC said. “We disagree.”

Regarding demand response resources, FERC said that it has stated that “as a general matter demand response providers and generators should be subject to comparable rules that reflect the characteristics of the resource.”

FERC said that it has explained that comparability does not require that generation resources and demand response resources be subject to the same operational parameters in every circumstance; treating “similarly-situated resources on a comparable basis does not necessarily mean that the resources are treated the same.”

Applying those standards in this case, FERC said that it finds that comparability does not require identical application to demand response resources and generation resources of PJM’s offer cap and the must-offer requirement, as alleged by the market monitor.

In its complaint, the market monitor asserted that, while demand response resources are currently cleared in PJM’s capacity market auctions as full substitutes for a generation capacity resource, demand response, for dispatch purposes in PJM’s energy market, is nonetheless treated as an emergency only resource with no obligation to submit an offer on a day-ahead basis.

By contrast, the market monitor argued, generation capacity resources are required to submit offers daily into PJM’s day-ahead energy market, subject to a default offer cap. The market monitor argued that PJM’s tariff fails to treat demand response resources and generation resources on a comparable basis, according to the order.

The market monitor said that while PJM attempted to address that concern, in part, with tariff revisions regarding pre-emergency demand response submitted in Docket No. ER14-822, the tariff changes proposed by PJM in that proceeding do not remedy the market imperfections at issue in the complaint.

Specifically, the market monitor argued that making some demand response dispatchable, just prior to an emergency, as required under PJM’s pre-emergency demand response provisions, will not ensure that those resources will be available to PJM on a basis that is fully comparable to generation capacity resources.

The market monitor requested that PJM be required to treat demand response as an economic resource required to offer into the day-ahead energy market, subject to the offer cap applicable to generation resources. The market monitor pointed to rules adopted by ISO New England (ISO-NE), which require demand response resources that have undertaken commitments in ISO-NE’s forward capacity market to make cost-based energy offers into ISO-NE’s day-ahead energy market and real-time energy market.

The market monitor asserted that while PJM’s currently effective rules establish energy market offer caps for demand response resources that significantly exceed the offer cap in place for generation capacity resources, those offer caps, which are set near shortage pricing levels, incorrectly value demand response. The market monitor asserted that demand resources may be valued as if PJM were short on reserves even if those are dispatched when PJM has adequate reserves, the order added.

In its answer, PJM said that FERC has not required identical treatment between demand response and generation capacity resources, recognizing there are inherent differences. PJM argued that the complaint discusses none of the distinctions between a generation plant and end-use customers that provide demand response, such as hospitals.

FERC noted that PJM disputed the market monitor’s argument that because generation and demand resources compete against each other to meet the same PJM capacity requirement, they must have the same must-offer requirement. PJM asserted that if competition alone was sufficient to warrant the application of identical rules, then FERC’s purported policy of considering the inherent differences in those resources would be rendered meaningless.

PJM argued that the market monitor failed to meet its burden of proof under FPA section 206 to show that PJM’s existing caps are unjust and unreasonable. PJM argued that while a must-offer requirement, as adopted by ISO-NE, could be regarded as just and reasonable, that finding does not render PJM’s tariff unjust and unreasonable.

In addition, PJM argued that the market monitor makes no showing that every price level for emergency load response above the offer cap is invalid or is justified only if PJM is short on reserves.

PJM asserted that the value of lost load for a particular end-use customer will be based on its operations and economic circumstance, and is not necessarily related to whether the system is short on reserves, the order explained.

FERC added that PJM also argued that lowering its existing offer caps for demand response committed as capacity could create pricing aberrations and operational concerns, given the market monitor’s proposed retention of PJM’s higher offer caps for virtual supply and demand and for non-capacity demand response resources, as applicable when PJM has exhausted reserves.

Regarding the offer caps, FERC said that PJM’s currently effective offer caps are calibrated to be consistent with the high end of the marginal cost of fuel and other inputs for generation bids. Specifically, PJM’s offer cap limits generation offers to the higher of $1,000/MWh or a resource’s short-run marginal cost, with a hard cap of $2,000/MWh. As a result, FERC added, generation resources are able to submit bids that reflect short-run marginal cost up to $2,000/MWh.

The cost of providing a load reduction for a demand response resource is the opportunity cost of foregoing production, as based on that entity’s operations and economic circumstances, FERC said, adding that as it has found, an offer cap is designed to allow demand response resources to submit offers that reflect the cost of providing demand response. As such, both demand response resources and generation resources are currently able to submit offers that reflect either the short-run marginal cost of providing energy or the cost of providing demand response, even though the mechanics of having those offers validated differ, FERC said.

As such, FERC found that the market monitor has failed to show that it is unjust, unreasonable, or unduly discriminatory or preferential for PJM to use a different offer cap mechanism for generation resources and demand response resources where both resource types are able to submit bids consistent with their short-run marginal costs.

Regarding the must-offer obligation, FERC noted that generation resources are in the business of providing energy and ancillary services, while demand response resources include such entities as hospitals and schools, whose primary purpose is typically not the provision of energy and ancillary services. There is greater likelihood that end-users may have legitimate reasons for a willingness to provide demand response when needed to support the reliability of the system, without extending that willingness to other circumstances.

FERC added that it has long allowed a distinction between demand response resource participation in a day-ahead or real-time energy market administered by an RTO or ISO and demand response under programs that RTOs or ISOs administer for reliability or emergency conditions. A requirement that a must-offer obligation must attach to demand response resources would undercut such a distinction, FERC said.

Among other things, FERC said that it disagrees that the ISO-NE capacity market revisions order requires the commission to grant the market monitor’s complaint. A determination that ISO-NE’s must-offer requirement is just and reasonable does not alone support a finding in this case that the absence of that requirement is unjust and unreasonable, particularly given the complexities at issue as between ISO-NE’s system and PJM’s system, FERC said.

In his statement, Clark that he dissents in part because he believes that the market monitor has more than met its FPA section 206 burden regarding the must-offer requirement.

Clark said he believes that it is a matter of good public policy and market design to treat resources that compete as full substitutes – such as demand resources and generation in PJM’s capacity market – on a comparable basis.

PJM’s current regime holds one resource class – generators – to a must-offer requirement paid at system wide marginal cost, while simultaneously exempting a second resource class – demand resources – from that must-offer requirement and then paying that class at the higher of a pre-determined strike price or system wide marginal cost. This is, on its face, discrimination, Clark added, noting that the question becomes, “is the discrimination undue?”

In the order, as the basis for finding that demand resources should remain exempt from a must-offer requirement, the majority takes the position that unlike generation resources, demand resources are not primarily in the business of providing energy and ancillary services, Clark said, adding, “I find this justification for discrimination unpersuasive.”

A resource’s primary business function is irrelevant after that same resource makes the voluntary decision to compete and receives a stream of funding from the wholesale market for capacity services, he said.

“I believe the commission is too quickly dismissing the concerns that have been raised by PJM’s neutral and independent market expert on matters related to how demand resources participate in the wholesale market,” Clark said. “I cannot help but feel that the subsidies and preferences that have been granted to certain demand-side products are coming at the expense of always available supply-side resources that we need, now more than ever.”

Among other things, Clark noted that the grid is changing rapidly, adding that he is concerned that eventually one or another region of the country will pay the price for a chronic underappreciation of utility-scale energy delivery and generation assets.

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