Wholesale Competition in Regions With Organized Electric Markets, 12576-12619 [E8-3984]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 73, Number 46 (Friday, March 7, 2008)]
[Proposed Rules]
[Pages 12576-12619]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-3984]



[[Page 12575]]

-----------------------------------------------------------------------

Part IV





Department of Energy





-----------------------------------------------------------------------



Federal Energy Regulatory Commission



-----------------------------------------------------------------------



18 CFR Part 35



 Wholesale Competition in Regions With Organized Electric Markets; 
Proposed Rules

Federal Register / Vol. 73, No. 46 / Friday, March 7, 2008 / Proposed 
Rules

[[Page 12576]]


-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket Nos. RM07-19-000 and AD07-7-000]


Wholesale Competition in Regions With Organized Electric Markets

Issued February 22, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
proposing to amend its regulations under the Federal Power Act to 
improve the operation of organized wholesale electric markets in the 
areas of: Demand response and market pricing during a period of 
operating reserve shortage; long-term power contracting; market-
monitoring policies; and the responsiveness of regional transmission 
organizations (RTOs) and independent system operators (ISOs) to 
stakeholders and customers, and ultimately to the consumers who benefit 
from and pay for electricity services. The Commission proposes to 
require that each RTO and ISO make certain filings that propose 
amendments to its tariff, in order to comply with the proposed 
requirements in each area, or that demonstrate that its existing tariff 
and market design already satisfy the requirements. The Commission 
invites all interested persons to submit comments in response to the 
regulations proposed herein.

DATES: Comments are due April 21, 2008.

ADDRESSES: You may submit comments, identified by docket number by any 
of the following methods.
     Agency Web site: https://ferc.gov. Documents created 
electronically using word processing software should be filed in native 
applications or print-to-PDF format and not in a scanned format.
     Mail/Hand Delivery: Commenters unable to file comments 
electronically must mail or hand deliver an original and 14 copies of 
their comments to: Federal Energy Regulatory Commission, Secretary of 
the Commission, 888 First Street, NE., Washington, DC 20426.
    Instructions: For detailed instructions on submitting comments and 
additional information on the rulemaking process, see the Comment 
Procedures Section of this document.

FOR FURTHER INFORMATION CONTACT: David Kathan (Technical Information), 
Office of Energy Market Regulation, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, 
David.Kathan@ferc.gov, (202) 502-6404.
    Tina Ham (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426,Tina.Ham@ferc.gov, (202) 502-6224.

SUPPLEMENTARY INFORMATION:

Table of Contents

 
                                                               Paragraph
                                                                numbers
 
I. Introduction.............................................           1
II. Background..............................................          12
III. Proposals To Expand the Scope of the Proceeding........          16
IV. Discussion..............................................          26
    A. Demand Response and Pricing During Periods of                  26
     Operating Reserve Shortages in Organized Markets.......
        1. Background.......................................          27
            a. Importance of Demand Response to Competition           28
             in RTO/ISO Areas...............................
            b. Prior Commission Actions To Address Demand             32
             Response.......................................
        2. The Need for Commission Action...................          37
        3. Proposed Reforms.................................          46
            a. Ancillary Services Provided by Demand                  47
             Response Resources.............................
                i. Preliminary Proposals in the ANOPR.......          47
                ii. Comments on the ANOPR Proposals and               50
                 Questions..................................
                iii. Commission Proposal....................          56
            b. Deviation Charge.............................          65
                i. Preliminary Proposals in the ANOPR.......          65
                ii. Comments on the ANOPR Proposals and               67
                 Questions..................................
                iii. Commission Proposal....................          72
            c. Aggregation of Retail Customers..............          80
                i. Preliminary Proposals in the ANOPR.......          80
                ii. Comments on the ANOPR Proposals and               82
                 Questions..................................
                iii. Commission Proposal....................          86
            d. Potential Future Demand Response Reforms.....          94
            e. Market Rules Governing Price Formation During          97
             Periods of Operating Reserve Shortage..........
                i. Preliminary Proposals in the ANOPR.......          97
                ii. Comments on the ANOPR Proposals and               99
                 Questions..................................
                iii. Commission Proposal....................         107
    B. Long-Term Power Contracting in Organized Markets.....         129
        1. Background.......................................         130
        2. The Need for Commission Action...................         134
        3. Preliminary Proposals in the ANOPR...............         138
        4. Comments on the ANOPR Proposals and Questions....         142
        5. Proposed Reforms.................................         155
    C. Market-Monitoring Policies...........................         162
        1. Background.......................................         163
        2. Prior Commission Actions Regarding Market                 165
         Monitoring.........................................
        3. The Need for Commission Action...................         169
        4. Proposed Reforms.................................         171
            a. Independence and Function....................         172
                i. Structure and Tools......................         173
                ii. Oversight...............................         183

[[Page 12577]]

 
                iii. Functions..............................         191
                iv. Mitigation and Operations...............         200
                v. Ethics...................................         211
                vi. Tariff Provisions.......................         215
            b. Information Sharing..........................         219
                i. Enhanced Information Dissemination.......         220
                ii. Tailored Requests for Information.......         231
                iii. Commission Referrals...................         238
            c. Pro Forma Tariff.............................         241
                i. Preliminary Proposals in the ANOPR.......         241
                ii. Comments on the ANOPR Proposals and              242
                 Questions..................................
                iii. Commission Proposal....................         243
    D. Responsiveness of RTOs and ISOs to Stakeholders and           245
     Customers..............................................
        1. Background.......................................         247
        2. Preliminary Proposals in the ANOPR...............         249
        3. Comments on the ANOPR Proposals and Questions....         254
            a. Comments on the Hybrid Board Approach........         255
            b. Comments on the Board Advisory Committee              264
             Approach.......................................
            c. Comments on the Need To Increase Management           268
             Responsiveness.................................
            d. Comments on Regional Differences.............         270
        4. The Need for Commission Action...................         272
        5. Proposed Reform..................................         275
V. Applicability of the Proposed Rule and Compliance                 282
 Procedures.................................................
VI. Information Collection Statement........................         286
VII. Environmental Analysis.................................         290
VIII. Regulatory Flexibility Act Certification..............         291
IX. Comment Procedures......................................         292
X. Document Availability....................................         296
 

APPENDIX A: Commenter Acronyms

I. Introduction

    1. The Federal Energy Regulatory Commission (Commission) is 
proposing reforms to improve the operation of organized wholesale 
electric power markets.\1\ Ensuring the competitiveness of organized 
wholesale markets is integral to the Commission fulfilling its 
statutory mandate to ensure adequate and reliable non-discriminatory 
service at just and reasonable rates. Effective competition protects 
consumers by providing greater supply options, encouraging new entry 
and innovation, and encouraging demand response and energy efficiency. 
In the past several years, the Commission has received both formal and 
informal comments from market participants, consumer and industry 
organizations, state regulators, and others recommending improvements 
to competitive wholesale markets.
---------------------------------------------------------------------------

    \1\ Organized market regions are areas of the country in which a 
regional transmission organization (RTO) or independent system 
operator (ISO) operates day-ahead and/or real-time energy markets.
---------------------------------------------------------------------------

    2. In response to these comments, the Commission held three public 
conferences in 2007 in order to gather more information on competition 
at the wholesale level and other related issues. At the first 
conference on competition issues, held on February 27, 2007, most 
speakers addressed issues affecting the RTO and ISO regions, including 
the levels of wholesale prices, the need for long-term power contracts, 
the effectiveness of market monitoring, and the lack of adequate demand 
response.\2\ On April 5, 2007, the Commission also held a technical 
conference on market monitoring policies and heard from interested 
commenters on issues such as the development of the concept and 
functions of market monitoring and the market monitoring units' (MMU) 
role with respect to the Commission, ISOs and RTOs, and various 
stakeholders.\3\ The Commission then held a second competition 
conference on May 8, 2007, to examine in more detail several specific 
concerns and challenges identified in the first conference. This second 
conference focused on regions with organized markets administered by 
RTOs and ISOs and dealt with: (1) Demand response, including the role 
of demand response during a period of operating reserve shortage; (2) 
fostering long-term power contracting; and (3) the responsiveness of 
RTOs and ISOs to customers and other stakeholders.\4\
---------------------------------------------------------------------------

    \2\ See Second Supplemental Notice of Conference, Conference on 
Competition in Wholesale Power Markets, Docket No. AD07-7-000 (Feb. 
26, 2007).
    \3\ See Notice of Agenda for the Conference, Review of Market 
Monitoring Policies, Docket No. AD07-8-000 (Mar. 30, 2007).
    \4\ See Supplemental Notice of Conference, Conference on 
Competition in Wholesale Power Markets, Docket No. AD07-7-000 (Apr. 
19, 2007).
---------------------------------------------------------------------------

    3. Based on the record compiled at these three conferences, the 
Commission issued an Advance Notice of Proposed Rulemaking (ANOPR) \5\ 
on June 22, 2007 to identify and implement improvements to specific 
aspects of organized wholesale markets. In the ANOPR, the Commission 
identified four issues in organized market regions that were not being 
adequately addressed or under consideration in other proceedings. These 
areas were: (1) The role of demand response in organized markets and 
greater use of market prices to elicit demand response during a period 
of operating reserve shortage; (2) increasing opportunities for long-
term power contracting; (3) strengthening market monitoring; and (4) 
enhancing the responsiveness of RTOs and ISOs to customers and other 
stakeholders, and ultimately to the consumers who benefit from and pay 
for electricity services.
---------------------------------------------------------------------------

    \5\ Wholesale Competition in Regions with Organized Electric 
Markets, Advance Notice of Proposed Rulemaking, 72 FR 36,276 (July 
2, 2007), FERC Stats. & Regs. ] 32,617 (2007).
---------------------------------------------------------------------------

    4. The Commission received several thousand pages of comments from 
over a hundred commenters in response to the ANOPR (a list of 
commenters and their abbreviated names the Commission will use for them 
in this document appears in Appendix A).\6\ After review of the 
comments, and pursuant to our responsibility under

[[Page 12578]]

sections 205 and 206 of the Federal Power Act (FPA) \7\ to ensure that 
rates, charges, classifications, and service of public utilities (and 
any rule, regulation, practice, or contract affecting any of these) are 
just and reasonable and not unduly discriminatory, the Commission is 
making several proposals in this NOPR designed to ensure just and 
reasonable rates and to remedy undue discrimination and preference and 
to improve wholesale competition in regions with organized markets. 
These proposals reflect the record compiled by the Commission in its 
conferences and in comments to the ANOPR. These proposals, along with 
background information and a summary of comments received, will be 
described in detail in the sections below.
---------------------------------------------------------------------------

    \6\ We do not summarize in this NOPR every comment received in 
response to the ANOPR. The Commission has reviewed and considered 
each comment submitted, however, and appreciates the careful 
consideration the commenters have given to this proceeding.
    \7\ 16 U.S.C. 824d-824e (2000).
---------------------------------------------------------------------------

    5. In proposing the reforms in the four areas described below, the 
Commission recognizes that there are differences of opinion on the 
appropriate scope of this rulemaking, as well as on the four specific 
issues described in the ANOPR. We are therefore guided by the record in 
this proceeding and the need to undertake timely and concrete reforms 
where the record supports them. From the commencement of our first 
technical conference in this proceeding, our goal has been to identify 
any specific reforms that can be made to optimize the efficiency of 
organized markets for the benefit of customers, and ultimately the 
consumers who benefit from and pay for electricity services. As we 
explain further below, however, this proceeding does not represent the 
final effort to improve the efficiency of competitive markets. Rather, 
we will continue to evaluate other specific reforms that may be 
necessary.
    6. In the area of demand response and the use of market prices to 
elicit demand response, the Commission proposes several requirements 
for ISOs and RTOs. These proposals include requirements to: (1) Accept 
bids from demand response resources in their markets for certain 
ancillary services, comparable to any other resources; (2) eliminate, 
during a system emergency, a charge to a buyer in the energy market for 
taking less electric energy in the real-time market than purchased in 
the day-ahead market; (3) permit an aggregator of retail customers 
(ARC) to bid demand response on behalf of retail customers directly 
into the organized energy market; (4) modify their market rules, as 
necessary, to allow the market-clearing price, during periods of 
operating reserve shortage, to reach a level that rebalances supply and 
demand so as to maintain reliability while providing sufficient 
provisions for mitigating market power; and (5) study whether further 
reforms are necessary to eliminate barriers to demand response in 
organized markets.
    7. In the section on long-term power contracting, the Commission 
proposes that ISOs and RTOs be required to dedicate a portion of their 
Web sites for market participants to post offers to buy or sell power 
on a long-term basis. This proposal is designed to promote greater use 
of long-term contracts through improving transparency among market 
participants.
    8. In the area of improving market monitoring, the Commission 
proposes that each RTO and ISO provide its MMU with access to market 
data, resources and personnel sufficient to carry out its duties, and 
that the MMU (or the external MMU in a hybrid structure) report 
directly to the RTO or ISO board. In addition, the Commission proposes 
to require that the MMU's functions include: (1) Identifying 
ineffective market rules and recommending proposed rules and tariff 
changes; (2) reviewing and reporting on the performance of the 
wholesale markets to the RTO or ISO, the Commission, and other 
interested entities; and (3) notifying appropriate Commission staff of 
instances in which a market participant's behavior requires 
investigation. The Commission also proposes expanding the list of 
recipients to receive MMU recommendations regarding rule and tariff 
changes, and broadening the scope of behavior to be reported to the 
Commission. The Commission further proposes to remove the MMU from 
tariff administration, require each RTO and ISO to include ethics 
standards for MMU employees in its tariff, and consolidate all its MMU 
provisions in one section of its tariff. The Commission also proposes 
expanding the dissemination of MMU market information to a broader 
constituency, with reports made on a more frequent basis, and reducing 
the time period before energy market bid and offer data are released to 
the public.
    9. Finally, the Commission proposes to establish new criteria 
intended to ensure that an RTO or ISO is responsive to its customers 
and stakeholders, and ultimately to the consumers who benefit from and 
pay for electricity services. These principles will include: (1) 
Inclusiveness; (2) fairness in balancing diverse interests; (3) 
representation of minority positions; and (4) ongoing responsiveness.
    10. In each of these four areas, the Commission will require RTOs 
and ISOs to consult with their stakeholders and make a compliance 
filing that details why the entity's existing practices comply with the 
final rule in this proceeding, or the entity's plans to attain 
compliance.
    11. Finally, as indicated above, these reforms do not represent our 
final effort to improve the functioning of competitive organized 
markets for the benefit of consumers. For example, although we are 
proposing specific reforms to eliminate barriers to demand response, we 
propose to require each RTO or ISO to study whether further reforms are 
necessary to eliminate barriers to demand response in organized 
markets. Any reforms must ensure that demand response resources are 
treated on a comparable basis as other resources. We also are ordering 
a staff technical conference on proposals by American Forest and 
Portland Cement Association, et al. to modify the design of organized 
markets. Finally, we direct, as explained further below, each RTO or 
ISO to provide a forum for affected consumers to voice specific 
concerns (and to propose regional solutions) on how to improve the 
efficient operation of competitive markets. The Commission therefore 
will continue to evaluate reforms in this area, but will not allow the 
prospect of other reforms to delay the benefits to consumers from those 
proposed herein.

II. Background

    12. As the Commission noted in the ANOPR, national policy has been, 
and continues to be, to foster competition in wholesale electric power 
markets.\8\ This policy was embraced in the recent Energy Policy Act of 
2005 (EPAct 2005),\9\ and is reflected in Commission policy and 
practice. The Commission, in fulfilling its responsibility to ``guard 
the consumer from exploitation by non-competitive electric power 
companies,'' \10\ relies on both its own regulations and competition to 
ensure consumer protection. In doing so, the Commission is aware of the 
need to vary the mix of regulation and competition based on the 
circumstances of the time, taking into account advances of technology, 
changes in economies of scale, and new state and federal laws that 
affect the energy industry.
---------------------------------------------------------------------------

    \8\ ANOPR, FERC Stats. & Regs. ] 32,617 at P 4.
    \9\ Pub. L. No. 109-58, 119 Stat. 594 (2005).
    \10\ Nat'l Ass'n for the Advancement of Colored People v. FPC, 
520 F.2d 432, 438 (DC Cir. 1975), aff'd, 425 U.S. 662 (1976).
---------------------------------------------------------------------------

    13. The Commission has acted over the last few decades to implement 
Congressional policy to expand the wholesale electric power markets to 
facilitate entry of new generators and to support competitive markets. 
Absent a

[[Page 12579]]

single national power market, the development of regional markets is 
the best method of facilitating competition within the power industry, 
and the Commission has made sustained efforts to recognize and foster 
such markets. The Commission acknowledges that significant differences 
exist between regions, including differences in industry structure, mix 
of ownership, sources for electric generation, population densities, 
and weather patterns. Some regions have organized spot markets 
administered by an RTO or ISO, and others rely solely on bilateral 
contracting between wholesale sellers and buyers. The Commission 
recognizes and respects these differences across various regions. At 
the same time, wholesale competition can serve customers well in all 
regions. The focus of this proceeding is on further improving the 
operation of wholesale competitive markets in organized market 
regions.\11\
---------------------------------------------------------------------------

    \11\ The following RTOs and ISOs have organized markets: PJM 
Interconnection, LLC (PJM), New York Independent System Operator, 
Inc. (NYISO), Midwest Independent Transmission System Operator, Inc. 
(Midwest ISO), ISO New England, Inc. (ISO-NE), California 
Independent Service Operator Corp. (CAISO), and Southwest Power 
Pool, Inc. (SPP).
---------------------------------------------------------------------------

    14. Some perceived challenges in the organized wholesale markets 
may be closely related to state retail issues, and the distinction 
between wholesale and retail competition challenges is often blurred. 
For example, wholesale customers typically have more advanced meters 
than retail customers; organized market rates vary with time of day 
whereas retail rates typically do not; and retail choice programs, 
which tend to be in areas served by organized wholesale markets, may 
rely on RTOs or ISOs to provide or arrange for the provision of some 
functions previously carried out by vertically integrated utilities. 
This has created challenges for wholesale market design. Although the 
Commission acknowledges that issues with retail markets are often 
intertwined with wholesale market issues, the Commission will not 
address retail market issues in this proceeding. This rulemaking is 
designed to focus on wholesale markets; issues related to retail 
markets will vary by state and are more appropriately considered in 
separate proceedings before the affected state(s) or the Commission 
where the specific interaction between the retail and wholesale market 
can be explored.
    15. Comments received on the ANOPR and made during technical 
conferences highlight several potential problems with wholesale 
competition both inside and outside the organized market regions that 
are within the scope of this proceeding. In the ANOPR, the Commission 
noted that it was not addressing potential reforms outside the 
organized market regions, explaining that many of the important 
concerns discussed during the first technical conference (e.g., 
nondiscriminatory access to transmission, nondiscriminatory rules for 
power procurement) were already being addressed in other proceedings. 
Similarly, the Commission has chosen to limit this proceeding to four 
discrete areas involving wholesale competition within organized 
markets. As explained further below, however, these are not the final 
reforms the Commission may pursue with respect to organized markets; 
rather, we will continue to evaluate specific proposals that may serve 
to strengthen organized markets.

III. Proposals To Expand the Scope of the Proceeding

    16. Several parties propose to expand the scope of this proceeding 
beyond the four areas covered in the ANOPR. We received a request from 
APPA, in its comments on the ANOPR, and a request from AARP, et al., a 
group consisting of 41 entities, for a large-scale investigation of the 
workings of organized markets with respect to their ability to produce 
just and reasonable rates. APPA and AARP, et al. state that the current 
market system allows incumbent sellers (those power suppliers with 
older power plants) to make excess profits while disadvantaging certain 
power suppliers with new generation. APPA and AARP, et al. argue that 
this has resulted in increased cost to consumers without the 
corresponding benefit of new generation being built. APPA and AARP, et 
al. claim that the Commission has a responsibility under sections 205 
and 206 of the FPA to investigate the workings of organized markets 
based on their allegations of unjust and unreasonable rates.
    17. The Commission acknowledges the concerns of APPA and AARP, et 
al.; however, we decline to initiate the broad investigation APPA and 
AARP, et al. have requested as part of this proceeding. As noted above, 
by listening to the concerns of market participants, and evaluating the 
record of this proceeding, we have identified four specific areas in 
which reforms can improve wholesale electricity market operations. 
Through the competition conferences and the ANOPR process, we have 
developed a solid record in favor of making those reforms, and a strong 
sense of what the Commission can do to be helpful in these four areas. 
It is important that the Commission move forward with regard to the 
specific reforms under consideration in this proposed rulemaking to 
foster improvements in the near term to the competitive operation of 
existing organized markets administered by RTOs and ISOs. Further, we 
also note that the approach we are taking in this NOPR is consistent 
with the ISO/RTO Council's proposal.\12\
---------------------------------------------------------------------------

    \12\ ISO/RTO Council urges the Commission to focus on 
determining the appropriate means of addressing issues that are ripe 
for this NOPR and which ones might be better considered in existing 
forums. It states that existing stakeholder processes provide an 
appropriate forum for targeted consideration of various issues, 
including the ones raised by APPA and AARP, et al. ISO/RTO Council 
at 1, 3.
---------------------------------------------------------------------------

    18. In contrast to the specific reforms proposed herein, APPA and 
AARP, et al. request a broad, generic inquiry into alleged (but not 
specified) market design flaws. Their request not only fails to offer 
any specific solutions, but also fails to appreciate the differences in 
market design that exist in each region. Over the past five years, the 
Commission has undertaken significant market design reforms in most 
regions. We have not adopted a standard market design, but rather have 
undertaken different reforms, at different times in each region to 
reflect the differing characteristics of each market. The Commission 
has devoted considerable resources over the years to improving the 
market designs in each organized market to ensure that they produce 
just and reasonable rates. We summarize some of these efforts below.
    19. For example, in response to the California energy crisis of 
2000-2001, the Commission worked with CAISO and its stakeholders to 
develop a Market Redesign and Technology Upgrade program designed to 
improve the efficiency and proper working of the market through 
improved modeling and new forward markets,\13\ which the Commission 
subsequently approved in part. In 2004, the Commission approved the 
Midwest ISO's open access transmission and energy markets tariff, which 
provides for terms and conditions necessary to implement a market-based 
congestion management program and energy spot markets.\14\ This 
includes a day-ahead energy market and a real-time energy market,

[[Page 12580]]

locational marginal pricing, and a market for financial transmission 
rights.
---------------------------------------------------------------------------

    \13\ Cal. Indep. Sys. Operator Corp., 116 FERC ] 61,274 (2006), 
order on reh'g, 119 FERC ] 61,076 (2007).
    \14\ Midwest Indep. Transmission Sys. Operator, Inc., 108 FERC ] 
61,163, order on reh'g, 109 FERC ] 61,157 (2004), order on reh'g 111 
FERC ] 61,043, reh'g denied, 112 FERC ] 61,086 (2005), aff'd sub 
nom. Wisconsin Public Power, Inc. v. FERC, 493 F.3d 239 (DC Cir. 
2007).
---------------------------------------------------------------------------

    20. The Commission has also acted on proposals developed by 
regional entities to ensure that adequate price signals exist in the 
market for both short-term and long-term electric power transactions, 
by addressing pricing issues during reserve shortages and by approving 
forward capacity markets. The Commission has approved a demand curve 
for capacity markets in the region operated by NYISO. The Commission 
approved PJM's Reliability Pricing Model to provide an auction process 
for forward capacity contracting. The Commission also approved a 
settlement agreement for ISO-NE to create a transitional forward 
capacity market to meet the needs of its stakeholders.\15\ These 
actions were designed to minimize the disruption during periods of 
operating reserve shortage and encourage new investment in generation, 
while accepting variation between regions and allowing for regional 
choice.
---------------------------------------------------------------------------

    \15\ Devon Power, LLC, 115 FERC ] 61,340, order on reh'g, 117 
FERC ] 61,133 (2006), appeal pending sub nom. Maine Pub. Utils. 
Comm'n v. FERC, No. 06-1403 (DC Cir. 2007).
---------------------------------------------------------------------------

    21. The Commission has also issued region-specific orders providing 
for cost allocation for new transmission investment, removing 
uncertainty over the cost responsibility for the development of new 
transmission. In Opinion No. 494,\16\ the Commission approved PJM's 
policy for determining recovery of transmission costs for existing and 
new facilities, providing for region-wide cost sharing for certain new 
extra high-voltage transmission facilities. The Commission also 
approved the Midwest ISO's transitional pricing scheme, which 
incorporates cost sharing for new transmission facilities.\17\
---------------------------------------------------------------------------

    \16\ PJM Interconnection, LLC, 119 FERC ] 61,063 (2007) (Opinion 
No. 494), reh'g pending.
    \17\ Midwest Indep. Transmission Sys. Operator, Inc., 114 FERC ] 
61,106, order on reh'g and technical conference, 117 FERC ] 61,241 
(2006), order on reh'g, 118 FERC ] 61,208 (2007), appeal pending sub 
nom. Public Service Comm'n of Wisconsin v. FERC, No. 06-1408 (D.C. 
Cir., filed Dec. 13, 2006); Midwest Indep. Transmission Sys. 
Operator, Inc., 118 FERC ] 61,209, order on reh'g, 120 FERC ] 61,080 
(2007).
---------------------------------------------------------------------------

    22. In addition to these region-specific actions, the Commission 
has addressed incentives for the building of new generation and 
transmission in all regions with organized markets. In Order No. 
679,\18\ the Commission allowed parties building transmission to apply 
for recovery of prudently incurred costs for construction work in 
progress, pre-operations, and abandoned facilities, and it provided for 
application for an incentive rate of return on equity for new 
transmission investment. As a further means of reducing uncertainty and 
spurring investment, the Commission finalized rules for interconnection 
for large, small and wind generators. These rules remove barriers to 
interconnection by streamlining the process of, and improving 
incentives for, building new generation. The Commission has also acted 
to improve certainty in the cost of transmission for electric customers 
by creating rules for long-term transmission rights in Order Nos. 681 
and 681-A.\19\
---------------------------------------------------------------------------

    \18\ Promoting Transmission Investment through Pricing Reform, 
Order No. 679, FERC Stats. & Regs. ] 31,222, order on reh'g, Order 
No. 679-A, FERC Stats. & Regs. ] 31,236 (2006), order on reh'g, 119 
FERC ] 61,062 (2007).
    \19\ Long-Term Firm Transmission Rights in Organized Electricity 
Markets, Order No. 681, FERC Stats. & Regs. ] 31,226, order on 
reh'g, Order No. 681-A, 117 FERC ] 61,201 (2006).
---------------------------------------------------------------------------

    23. In Order No. 890, the Commission reformed the open access 
transmission tariff (OATT) to ensure that it continues to provide 
nondiscriminatory access to transmission service. Among other things, 
Order No. 890 requires an open and transparent regional transmission 
planning process.\20\ The Commission is now focusing on the compliance 
phase of OATT reform to ensure that it is implemented properly.\21\ The 
Commission also has been pursuing a cooperative dialogue with the 
National Association of Regulatory Utility Commissioners (NARUC) to 
identify and analyze models for competitive power procurement. This 
effort is designed to enhance the ability of load-serving entities 
(LSEs) to acquire reliable power supplies at competitive prices. As 
noted in the ANOPR, the Commission has also acted to investigate demand 
response in organized markets, through a Commission report and a recent 
technical conference. This conference was designed to examine demand 
response resources in markets, grid operations and expansion, and best 
practices for the measurement and evaluation of demand response 
resources.\22\ The Commission also held a technical conference on 
December 11, 2007 to explore issues surrounding the management of 
interconnection queues.\23\
---------------------------------------------------------------------------

    \20\ This addresses, in part, concerns raised by some commenters 
regarding posting of future transmission constraints and congestion 
costs.
    \21\ ANOPR, FERC Stats. & Regs. ] 32,617 at P 33 (citing 
Preventing Undue Discrimination and Preference in Transmission 
Service, Order No. 890, 72 FR 12,266 (Mar. 15, 2007), FERC Stats. & 
Regs. ] 31,241, order on reh'g, Order No. 890-A, FERC Stats. & Regs. 
] 31,261 (2007)).
    \22\ Supplemental Notice, Demand Response in Wholesale Markets, 
Docket No. AD07-11-000 (April 6, 2007).
    \23\ Notice of Technical Conference, Interconnection Queuing 
Practices, Docket No. AD08-2-000 (November 2, 2007).
---------------------------------------------------------------------------

    24. In recognition of our continuing respect for regional 
differences in market design, we believe that, if there are specific 
concerns about the market designs in a particular region, they should 
be considered, in the first instance, at the regional level. We 
therefore direct each RTO or ISO to provide a forum for affected 
consumers to voice specific concerns (and to propose regional 
solutions) to the issues raised generically by APPA and AARP, et al. 
Although most existing stakeholder processes already allow for the 
submission of such proposals, we encourage RTOs and ISOs to give 
priority to any significant concerns that may be raised on these 
issues, including concerns as to the value to the market of significant 
changes to the market rules. For example, PJM recently has conducted a 
series of forums on long-term contracts to gather information and 
facilitate the exchange of ideas on this important issue. We encourage 
similar efforts on the concerns raised by APPA and AARP, et al. Any 
proposed solutions should be vetted through the stakeholder process and 
ultimately considered by the boards of the RTOs or ISOs. Ultimately, 
such matters may be brought to the Commission after consideration by 
the region. We encourage each region to commence the consideration of 
any such issues in the near future and not await the issuance of a 
final rule in this proceeding.
    25. However, those entities that have such concerns have a 
responsibility to propose solutions to address those concerns. For 
example, American Forest submitted comments that contained a mechanism, 
the Financial Performance Obligation (FPO), to address concerns that 
they raised regarding the structure of organized markets. Portland 
Cement Association, et al., also included a proposed solution in its 
comments to address their concerns regarding the organized markets. We 
are encouraged by entities that actually propose solutions rather than 
merely identify concerns without proposing any meaningful ways to 
address those concerns. While we do not adopt these proposals in this 
proceeding, we believe that they warrant additional consideration. 
Therefore, as explained below, we direct Staff to convene a technical 
conference regarding the American Forest and Portland Cement 
Association, et al., proposals so that the Commission and the industry 
can learn

[[Page 12581]]

more about the proposals and the merit of adopting such changes where 
appropriate.

IV. Discussion

A. Demand Response and Pricing During Periods of Operating Reserve 
Shortages in Organized Markets

    26. This section of the NOPR proposes several reforms to further 
eliminate barriers to demand response in organized energy markets. 
These reforms must ensure that demand response is treated comparably to 
other resources. The Commission proposes to require RTOs and ISOs to: 
(1) Accept bids from demand response resources in their markets for 
certain ancillary services, comparable to other resources; (2) 
eliminate, during a system emergency, certain charges to buyers in the 
energy market for voluntarily reducing demand; and (3) permit ARCs to 
bid demand response on behalf of retail customers directly into the 
RTO's or ISO's organized markets.\24\ We also propose that RTOs and 
ISOs modify their rules governing price formation during periods of 
operating reserve shortage. These proposals, if adopted, would require 
market rules to ensure that demand response can participate directly 
and is treated comparably to supply resources in the organized electric 
energy and ancillary services markets. We also propose to require that 
each RTO and ISO study further reforms to address any remaining 
barriers to ensure that demand response is treated comparably to other 
resources and to report to the Commission within six months of the date 
of the final rule in this proceeding. In addition, we propose that each 
RTO or ISO must adopt reasonable standards necessary for system 
operators to call on demand response resources, and mechanisms to 
measure, verify, and ensure compliance with any such standards.\25\ As 
discussed further below, we intend to direct staff to convene a 
technical conference to explore issues that the RTOs and ISOs should 
include as part of these studies. The specific reforms being proposed 
here are therefore the next step in removing barriers to demand 
response, but not the final step.
---------------------------------------------------------------------------

    \24\ We will use the phrase ``aggregation of retail customers'' 
to refer to parties that aggregate demand response bids (which are 
mostly from retail loads), or ARCs.
    \25\ We understand that some RTOs and ISOs may already be 
developing measurement and verification requirements, as well as 
appropriate mechanisms to ensure compliance. It is not our intention 
that these programs be delayed based on our proposals here.
---------------------------------------------------------------------------

1. Background
    27. The Commission has expressed the view on numerous occasions 
that the wholesale electric power market works best when demand can 
respond to the wholesale price.\26\ Based on the view that the value to 
customers of electric power varies,\27\ the Commission's policy is to 
eliminate barriers to the participation of demand response in the 
organized power markets, in part because demand response helps to hold 
down wholesale power prices; increases awareness of energy usage; 
provides for more efficient operation of markets; mitigates market 
power; enhances reliability; and encourages new technologies that 
support the use of renewable energy resources, distributed generation, 
and advanced metering. The reforms we propose today would further 
facilitate demand response by removing several barriers to demand 
response. This will benefit customers of electric energy because 
increased demand response will improve price signals and provide for 
greater flexibility. We provide background on the benefits of demand 
response and prior Commission actions addressing demand response below.
---------------------------------------------------------------------------

    \26\ New England Power Pool and ISO New England, Inc., 101 FERC 
] 61,344, at P 44-49 (2002), order on reh'g, 103 FERC ] 61,304, 
order on reh'g, 105 FERC ] 61,211 (2003); PJM Interconnection, LLC, 
95 FERC ] 61,306 (2001); PJM Interconnection, LLC, 99 FERC ] 61,227 
(2002); Southwest Power Pool, Inc., 116 FERC ] 61,289 (2006).
    \27\ That is, for two customers at the same time and place, one 
customer may prefer to reduce consumption if the price is high, and 
the other may be willing to pay a high price to avoid curtailment in 
an emergency.
---------------------------------------------------------------------------

a. Importance of Demand Response to Competition in RTO/ISO Areas
    28. A well-functioning competitive wholesale electric market should 
reflect current supply and demand conditions. Enabling demand-side 
responses, as well as supply-side resources, improves the economic 
operation of electric power markets by aligning prices more closely 
with the value customers place on electric power.
    29. Demand response helps to reduce prices in competitive wholesale 
markets in at least three ways. First, demand response has both a 
direct effect and an indirect effect on wholesale demand. The direct 
effect occurs when demand response is bid directly into the wholesale 
market: lower demand means a lower wholesale price. Demand response at 
retail, if not bid directly into the wholesale market by a retail 
customer, affects the wholesale market indirectly because it reduces 
the need for power by the retail customers' LSE and in turn reduces 
that LSE's need to purchase power from the wholesale market.\28\
---------------------------------------------------------------------------

    \28\ See Federal Energy Regulatory Commission, Assessment of 
Demand Response and Advanced Metering: Staff Report, Docket No. 
AD06-2-000, at 11 (August 8, 2006) (2006 FERC Staff Demand Response 
Assessment).
---------------------------------------------------------------------------

    30. Second, demand response tends to flatten an area's load 
profile. The combination of reductions in peak demand and a shift of at 
least a portion of this peak demand to non-peak periods due to demand 
response would tend to make peak and off-peak demand less divergent--a 
flatter load profile. A flatter load profile would reduce the need to 
use the more costly resources during periods of high demand, which 
tends to shift the distribution of resource types toward lower-cost 
base load generation and away from higher-cost peaking generation. This 
effect tends to lower the overall average cost to produce energy.\29\
---------------------------------------------------------------------------

    \29\ Id.
---------------------------------------------------------------------------

    31. Third, demand response can help reduce generator market power. 
As more demand response generally is available during peak periods, 
power suppliers need to account more for the price responsiveness of 
load when they consider submitting higher-price bids. The more demand 
response is able to reduce the peak price, the more downward pressure 
it places on generator bidding strategies by increasing the risk to a 
supplier that it will not be dispatched if it bids too high.\30\
---------------------------------------------------------------------------

    \30\ Id. at 12.
---------------------------------------------------------------------------

b. Prior Commission Actions To Address Demand Response
    32. The Commission has issued numerous orders over the last several 
years on various aspects of electric demand response in organized 
markets. A goal of most of these orders was to remove unnecessary 
obstacles to demand response participating in the wholesale power 
markets of RTOs and ISOs.\31\
---------------------------------------------------------------------------

    \31\ See, e.g., New York Indep. Sys. Operator, Inc., 92 FERC ] 
61,073, order on clarification, 92 FERC ] 61,181 (2000), order on 
reh'g, 97 FERC ] 61,154 (2001); New England Power Pool and ISO New 
England, Inc., 100 FERC ] 61,287, order on reh'g, 101 FERC ] 61,344 
(2002), order on reh'g, 103 FERC ] 61,304, order on reh'g, 105 FERC 
] 61,211 (2003); PJM Interconnection, LLC, 95 FERC ] 61,306 (2001); 
PJM Interconnection, LLC, 99 FERC ] 61,139 (2002); PJM 
Interconnection, LLC, 99 FERC ] 61,227 (2002).
---------------------------------------------------------------------------

    33. These orders approved various types of demand response 
programs, including programs to allow demand response to be used as a 
capacity resource \32\ and as a resource during

[[Page 12582]]

system emergencies,\33\ to allow wholesale buyers and qualifying large 
retail buyers to bid demand response directly into the day-ahead and 
real-time energy markets and certain ancillary service markets, 
particularly as a provider of operating reserves, as well as programs 
to accept bids from ARCs.\34\ The Commission also has approved special 
demand response applications such as use of demand response for 
synchronized reserves and regulation service.\35\ The theme underlying 
the Commission's approval of these programs has been to allow demand 
response resources to participate in these markets on a basis that is 
comparable to other resources.
---------------------------------------------------------------------------

    \32\ See, e.g., PJM Interconnection, LLC, 117 FERC ] 61,331 
(2006); Devon Power LLC, 115 FERC ] 61,340, order on reh'g, 117 FERC 
] 61,133 (2006), appeal pending sub nom. Maine Pub. Utils. Comm'n v. 
FERC, No. 06-1403 (DC Cir. 2007).
    \33\ See, e.g., New York Indep. Sys. Operator, Inc., 95 FERC ] 
61,136 (2001); NSTAR Services Co. v. New England Power Pool, 95 FERC 
] 61,250 (2001); New England Power Pool and ISO New England, Inc., 
100 FERC ] 61,287, order on reh'g, 101 FERC ] 61,344 (2002), order 
on reh'g, 103 FERC ] 61,304, order on reh'g, 105 FERC ] 61,211 
(2003); PJM Interconnection, LLC, 99 FERC ] 61,139 (2002).
    \34\ See, e.g., New York Indep. Sys. Operator, Inc., 95 FERC ] 
61,223 (2001); New England Power Pool and ISO New England, Inc., 100 
FERC ] 61,287, order on reh'g, 101 FERC ] 61,344 (2002), order on 
reh'g, 103 FERC ] 61,304, order on reh'g, 105 FERC ] 61,211 (2003); 
PJM Interconnection, LLC, 99 FERC ] 61,227 (2002).
    \35\ See, e.g., PJM Interconnection, LLC, 114 FERC ] 61,201 
(2006).
---------------------------------------------------------------------------

    34. The Commission has approved programs that allow smaller retail 
customers--that cannot individually meet the RTO or ISO minimum bid 
size threshold--to combine individual demand response into a larger 
block for bidding into the organized markets, if permitted by state 
law, without having to go through their LSE.\36\ A third-party ARC, 
often called a curtailment service provider, typically provides this 
aggregation service. The aggregate demand response may be bid directly 
into the energy and ancillary services markets.
---------------------------------------------------------------------------

    \36\ Supra note 34.
---------------------------------------------------------------------------

    35. In addition, the Commission has explicitly addressed demand 
response in its recent Final Rules on OATT Reform (Order No. 890) and 
reliability standards (Order No. 693).\37\ Order No. 890 requires any 
public utility with an OATT to allow qualified demand response 
resources to participate in its regional transmission planning process 
on a comparable basis to generation resources and to allow qualified 
demand response to provide certain ancillary services. Specifically, 
the Commission agreed with Alcoa's request that load resources (i.e., 
demand response) should be permitted to self-supply and sell ancillary 
services to third parties.\38\ In doing so, the Commission also made 
clear that a transmission provider may use non-generation resources in 
meeting its OATT obligation to provide ancillary services, so long as 
those resources are capable of providing the service.\39\ Order No. 693 
requires the Electricity Reliability Organization to revise its 
reliability standards so that all technically feasible resource 
options, including demand response and generating resources, may be 
employed in the management of grid operations and emergencies.\40\
---------------------------------------------------------------------------

    \37\ See Mandatory Reliability Standards for the Bulk-Power 
System, Order No. 693, 72 FR 16,416 (April 4, 2007), FERC Stats. & 
Regs. ] 31,242, order on reh'g, Order No. 693-A, 120 FERC ] 61,053 
(2007).
    \38\ Order No. 890, FERC Stats. & Regs. ] 31,241 at P 887-88.
    \39\ E.g., Order No. 890, FERC Stats. & Regs. ] 31,241 at OATT 
Schedule 5 (Operating Reserve--Spinning Reserve Service). Order No. 
890 does not require transmission providers, however, to purchase 
ancillary services from non-generation resources or generation 
resources.
    \40\ Order No. 693 directed the Electricity Reliability 
Organization to develop new versions of its BAL-002, BAL-005, and 
EOP-002 reliability standards to allow demand side resources to 
provide contingency reserves. Order No. 693, FERC Stats. & Regs. ] 
31,242 at P 330-35, 404-06, 573.
---------------------------------------------------------------------------

    36. The Commission has also worked closely with state regulators to 
examine demand response issues. The NARUC-FERC Collaborative Dialogue 
on Demand Response began in November 2006 to explore state-federal 
coordination of efforts to promote and integrate demand response into 
retail and wholesale markets. The Commission has conducted several 
technical conferences on demand response over the last several years, 
most recently on April 23, 2007.\41\ In addition, as mentioned, in 
response to a requirement of EPAct 2005 \42\ to assess demand response 
capability nationally, in August 2006 the Commission published a staff 
report on demand response and advanced metering.\43\ In September 2007, 
the Commission published its second annual staff report on demand 
response and advanced metering.\44\
---------------------------------------------------------------------------

    \41\ For example, the Commission conducted a technical 
conference on January 25, 2006 to help prepare for a survey and a 
staff report on demand response in Docket No. AD06-2-000. See supra 
note 28. The April 23, 2007 conference was convened in Docket No. 
AD07-11-000.
    \42\ Public Law No. 109-58, Sec.  1252(e)(3), 119 Stat. 594, 966 
(2005).
    \43\ See 2006 FERC Staff Demand Response Assessment.
    \44\ See Federal Energy Regulatory Commission, 2007 Assessment 
of Demand Response and Advanced Metering: Staff Report, (September 
2007) (2007 FERC Staff Demand Response Assessment).
---------------------------------------------------------------------------

2. The Need for Commission Action
    37. While the Commission and the various RTOs and ISOs have done 
much to eliminate barriers to demand response in organized power 
markets, more needs to be done to ensure comparable treatment of all 
resources. The 2006 FERC Staff Demand Response Assessment estimated the 
total installed demand response capability from existing programs 
nationally to be 37,500 MWs, or about five percent of current peak 
demand.\45\ Several reports indicate that the potential demand response 
capability available in the United States may be much greater.\46\
---------------------------------------------------------------------------

    \45\ 2006 FERC Staff Demand Response Assessment at 7.
    \46\ See, e.g., Ahmad Faruqui et al., The Brattle Group, The 
Power of Five Percent: How Dynamic Pricing Can Save $35 Billion in 
Electricity Costs (May 16, 2007), available at https://
www.brattle.com/_documents/UploadLibrary/Upload574.pdf.
---------------------------------------------------------------------------

    38. The Commission's policy is to eliminate barriers to the 
participation of demand response in the organized power markets by 
ensuring comparable treatment of resources. This position is consistent 
with EPAct 2005, which states that demand response shall be encouraged 
and unnecessary barriers to demand response participation in energy, 
capacity, and ancillary service markets shall be eliminated.\47\ The 
Commission can take additional steps to further encourage demand 
response to improve the operation of the organized energy and ancillary 
services markets by removing several unnecessary barriers to demand 
response participation.\48\
---------------------------------------------------------------------------

    \47\ Section 1252(f) of the EPAct 2005 states that, ``[i]t is 
the policy of the United States that time-based pricing and other 
forms of demand response whereby electricity customers are provided 
with electricity price signals and the ability to benefit by 
responding to them, shall be encouraged, the deployment of such 
technology and devices that enable electricity customers to 
participate in such pricing and demand response systems shall be 
facilitated, and unnecessary barriers to demand response 
participation in energy, capacity, and ancillary service markets 
shall be eliminated.''
    \48\ We note that while the Commission can remove some obstacles 
to demand participation in organized markets, more effective demand 
response also requires the action of state commissions. An effective 
way for demand to respond to price is at the retail level, through 
some form of time-based retail rates (e.g., rates that vary by hour, 
such as real-time pricing, or by blocks of time, such as time-of-use 
rates or critical peak pricing). Demand response is more effective 
when retail rates are tied to current wholesale market-clearing 
prices. Effective demand response can be achieved by linking the 
wholesale and retail markets.
---------------------------------------------------------------------------

    39. The Commission can further eliminate barriers to the 
participation of demand response in certain ancillary services markets. 
Some forms of demand response are well suited to provide the ancillary 
services of spinning reserves, supplemental

[[Page 12583]]

reserves, energy imbalance, and regulation and frequency response.\49\ 
Because demand is always connected and demand response, in principle, 
can always be available, some forms of demand response resources may be 
able to provide a rapid, near real-time response.\50\ Nevertheless, not 
all RTOs and ISOs allow demand response to participate in ancillary 
services markets. ISO-NE, NYISO, and CAISO allow demand response 
resources to provide supplemental (non-spinning) reserves. As of mid-
2007, only PJM allows demand response resources to provide synchronized 
reserves (PJM's term for spinning reserves) and regulation service.\51\
---------------------------------------------------------------------------

    \49\ See 2006 FERC Staff Demand Response Assessment at 51. For 
an explanation of each of these ancillary services, see the pro 
forma OATT, Schedules 3 through 6, contained in Order No. 890.
    \50\ For example, electric-arc steel furnaces have the 
capability to adjust their consumption rapidly, and air conditioner 
cycling programs can respond within several minutes of execution.
    \51\ We note, however, that no resource has yet qualified to 
provide this service to PJM.
---------------------------------------------------------------------------

    40. In Order No. 890, the Commission modified the definitions of 
certain ancillary services in the pro forma open access transmission 
tariff to clarify that demand response is eligible to supply these 
ancillary services on a comparable basis to generation resources. Order 
No. 890 concluded, however, that procurement and pricing of ancillary 
services--including issues related to competitive procurement--were 
beyond the scope of that rulemaking. Though RTOs and ISOs procure 
ancillary services through competitive market means, they are not 
currently required to accept bids from qualified demand response 
providers to provide ancillary services even if those providers are 
technically capable of doing so. This hinders the integration of 
qualified demand response resources into these RTO and ISO ancillary 
services markets.
    41. One reason for the lack of participation of demand response in 
some ancillary service markets may be that market rules for bidding and 
participating in ancillary services markets were developed with 
generation in mind and may not accommodate demand response resources. 
For example, many demand response resources can respond quickly and at 
a low cost if called upon for a short duration, which may make them 
well suited for providing operating reserves. If market rules require, 
however, that a single bid be made into a joint energy-plus-reserves 
market (also known as a ``co-optimized'' market), those seeking to 
offer operating reserves risk being dispatched to provide energy or 
other ancillary services for which they are not well suited. As a 
result, a potential operating reserve provider that does not wish to be 
called upon frequently or for a prolonged period in the energy market 
may simply decide not to participate in a co-optimized market, and 
consequently not be a source for providing demand response resources as 
operating reserves. Market rules that do not allow a demand response 
provider to limit the frequency and duration of interruption may 
thereby create a disincentive for a demand response resource to bid 
into the operating reserves market.\52\
---------------------------------------------------------------------------

    \52\ See 2006 FERC Staff Demand Response Assessment at 123.
---------------------------------------------------------------------------

    42. Further, demand response providers need market rules that allow 
bids to be flexible and that reflect bidders' willingness to offer 
various levels of service depending on the market prices. While the 
design of today's organized markets does allow some flexible and some 
price-sensitive bidding into day-ahead and real-time energy markets, 
the Commission is nevertheless concerned that some market features may 
inhibit LSEs and other demand response providers from bidding load 
reductions into energy markets. For example, in most organized markets, 
if an LSE's actual purchase from the real-time market differs from the 
purchase it scheduled in the day-ahead market, it may be assessed an 
uplift charge (separate from any imbalance charge). This uplift charge 
recovers certain costs of extra generation when day-ahead purchases 
exceed real-time purchases. However, these costs may be minimal during 
an emergency when there is no extra generation. Further, this uplift 
charge may unnecessarily discourage an LSE from urging retail customers 
to conserve energy during a system emergency. RTO and ISO tariffs also 
do not impose these types of charges on generators that generate more 
power during system emergencies than scheduled. Eliminating this uplift 
charge for demand response sought by RTOs or ISOs from buyers in an 
emergency removes a disincentive for this demand response and promotes 
comparable treatment of demand and supply resources.
    43. Organized energy market rules also may restrict the type of bid 
that a LSE or ARC may submit.\53\ There is usually a minimum bid size 
threshold in an RTO or ISO market. Also, it is hard for some demand 
response providers to participate if, for example, they are not able to 
start and stop frequently or if cycling output up and down produces 
excessive stress on their equipment. Aggregation programs can improve 
the participation of small retail loads that lack standing as an LSE or 
individually cannot meet a requirement that a demand response bid be of 
minimum size. These programs allow a larger number of customers to 
access demand response programs, which increases the potential market 
and reliability benefits realized from demand response in wholesale 
markets. The 2006 FERC Staff Demand Response Assessment and comments 
that we have received indicate, however, that more needs to be done to 
facilitate the direct participation of ARCs in energy markets.
---------------------------------------------------------------------------

    \53\ In some cases, this may be intended to treat a demand 
response resource bid the same as a generation bid, but more often, 
bidding features available to generation, such as a guaranteed 
minimum price, are not available to demand response resources.
---------------------------------------------------------------------------

    44. Another factor that may limit participation in demand response 
programs is the use of bid caps and price caps in wholesale market 
design. Bid caps and price caps in RTO and ISO markets are designed to 
limit the opportunity to exercise market power in these markets, but 
they also may prevent the markets from expressing prices that are 
legitimately high due to a shortage. These caps may not permit buyers 
in RTO and ISO wholesale energy markets to see prices high enough to 
signal that there is a period of operating reserve shortage and that 
reliability is at risk. Moreover, when power is in short supply and 
price is high, retail prices remain fixed, and retail customers do not 
adjust their demand to react to wholesale price signals. Consequently, 
both generation and demand response can be in short supply at once, and 
the market-clearing price may not reflect the actual cost of providing 
more power or the value to customers of not being interrupted. Further, 
as discussed in the long-term contracting section below, capping the 
exposure of