The Federal Energy Regulatory Commission’s Supplemental Notice of Proposed Rulemaking (NOPR) addresses the question of proper compensation for demand response in organized wholesale electricity markets. Assuming that the Commission would proceed with the proposal “to require tariff provisions allowing demand response resources to participate in wholesale energy markets by reducing consumption of electricity from expected levels in response to price signals, to pay those demand response resources, in all hours, the market price of energy (also referred to as the ‘locational marginal price’ or ‘LMP’) for such reductions,” the Commission posed questions about applying a net benefits test and rules for cost allocation. There is now an extensive record in this matter, and I have written on the various issues. The purpose of the present paper is to summarize critical points and pose implications for the issues of net benefit tests and cost allocation. The limited time of the technical conference format dictates a certain brevity, referring to the prior submissions for a fuller exposition. My comments highlight several questions: Why are we here? Why is this subject so confusing? Why are retail rates relevant? How can we match ends and means? Do we need a net benefits test? How should we allocate costs? Where should we go from here?
Hogan, William W. "Demand Response Compensation, Net Benefits and Cost Allocation: Preliminary Comments." Testimony to the Federal Energy Regulatory Commission Technical Conference, Docket RM10-17-000, September 13, 2010.