Demand Response:
Four Options for Action, Four Mistakes to Avoid

My June essay, "D.C. Circuit Kills Demand Response Compensation: Now What?" offered ways to keep demand response traffic moving around the court's decision invalidating FERC Order 745. To recap: The court held that FERC has no power to order (or approve regional transmission organization tariffs requiring) buyers of energy in RTO-organized markets to compensate retail consumers for demand response. The Court's reasoning seemed to have two prongs: (1) FERC cannot order compensation to retail consumers for any product, because it has no jurisdiction over "retail markets"; and (2) FERC cannot order compensation for demand response, because demand response is not a FERC-jurisdictional product.

Thanks to many conversations since June, here are four more options for action. Credit for insights goes to my colleagues; blame for flaws lies with me. Following the four options are four mistakes to avoid.

Four Options for Action

Can FERC order compensation for demand response, if the demand response is sold by, and the compensation is received by, entities other than retail consumers? The court condemned the compensation because it went to retail consumers. But the universe of possible sellers includes load-serving entities, and non-utility aggregators (provided the latter are not merely agents for retail consumers, but instead take economic risk by buying demand response from retail consumers and reselling into the RTO market). The option escapes the court's Scylla because . . .

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“Regulatory capture” is a ringing phrase, too casually used. But because it is a hyperbolic phrase, it is too readily dismissed. With a careful definition, regulatory capture can be anticipated, detected, and resisted. Regulatory capture does not include illicit acts—financial bribery, threats to deny reappointment, promises of a post-regulatory career. These things all have occurred, but they are forms of corruption, not capture. Nor is regulatory capture a state of being controlled, where regulators are robots executing commands issued by interest groups.
In this proceeding before the Mississippi Public Service Commission, Entergy proposes to sell its transmission facilities to ITC at a gain. The transaction is a “spin-merge” transaction in which Entergy shareholders will end up owning 51% of ITC, along with their shares of Entergy.
Utilities are seeking to earn returns on equity above the real cost of equity. Currently, there are five strategies: (1) move assets from state jurisdiction to FERC jurisdiction; (2) use holding company debt to fund utility subsidiary equity (aka "double leveraging); (3) seek supranormal returns as "incentives" to perform normal tasks; (4) seek authorized returns that reflect certain business risks while shifting those risks to ratepayers; and (5) use "riders" reduce business risks without reducing authorized return on equity. This presentation describes these strategies.
After a century of near-choicelessness, consumers want supply choices and lower costs; while after a century of solid service, traditional utilities want predictable demand and stable revenues. On both sides, the arguments shade from legitimate and public-spirited to the cagey and opportunistic. Resolving the conflicts requires us to apply economic and legal reasoning that reflects common sense, economic efficiency, and constitutional principles. This article seeks to sort out these points.

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While we will dearly miss you as NRRI's Executive Director—where you have been so invaluable—I am delighted that you will now be in the classroom enlightening and sparking the interest of the next generation.
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